Employers must issue Form W-2, Wage and Tax Statement, to employees by January 31st, so you should have received yours by now. But have you ever actually stopped to look at your W-2? And do you know what it all means? Your W-2 is an important tax document and understanding the amounts reported on the form can give you greater insight into your tax and financial picture. This post explains some of the most common items on the form.
Wages and tax withheld
The amount of wages that are taxable to you are reported in Box 1. This amount is usually different from your gross wages, as it is adjusted for certain pre-tax deductions or exclusions. The amount of tax withheld in Box 2 represents the amount of tax that you’ve paid towards your federal tax liability.
Some people like to use withholdings as a forced savings and purposefully withhold more than needed so that they have a refund when they file their returns. Others see this as a tax-free loan to the government and would prefer to withhold as little as possible. Still others have significant income from investments, businesses, or other sources and can use withholdings as a way to pay towards their tax liability without the need to make quarterly estimates. Whether your withholdings will be sufficient to cover your actual tax liability depends on your particular situation, and you should check your withholdings throughout the year, and adjust as necessary.
State wages and withholdings are reported in Boxes 16 and 17. For Massachusetts residents, your Box 1 taxable wages will generally equal your state wages reported in Box 16, however, in certain situations, these amounts may be different. This is typically true if you are contributing to a Massachusetts sponsored pension plan. If you see a state code in addition to “MA” in Box 15, you may need to file an income tax return in that other state.
Generally, your wages are subject to additional taxation under the Federal Insurance Contributions Act (FICA), and the tax is broken into two portions – Social Security and Medicare. The wages that are subject to FICA taxes are often different from your gross wages and your Box 1 taxable wages. Social Security wages are reported in Box 3, and Medicare wages are reported in Box 5.
The tax on these wage amounts is withheld from each paycheck that you receive. The Social Security portion of the tax is withheld at a rate of 6.2% on your Box 3 wages (up to a cap of $132,900), and the tax is reported in Box 4. Note, the cap increases to $137,700 in 2020. The Medicare portion of the tax is withheld at a rate of 1.45% on your Box 5 wages (with no cap), and the tax is reported in Box 6. High earners may be subject to the additional Medicare tax, a 0.9% tax added as part of the Affordable Care Act. Your employer must withhold this additional tax if your Box 5 Medicare wages exceed $200,000.
A review of your W-2 can also give you a better understanding of your retirement planning, an important consideration for your financial well-being. This is especially true if your company will match your elective deferrals, so you should review this with your financial advisor or tax professional.
If “Retirement plan” is checked in Box 13, you are covered by your employer’s retirement plan (even if you are not participating in the plan). Elective deferrals to your 401(k) retirement plan with your employer are reported in Box 12, Code D. Your employer may have a Roth 401(k) option available to you, which allows you to make elective contributions to a Roth 401(k) plan instead of a traditional 401(k) plan. Any contributions made to such a plan are reported in Box 12, Code AA.
Elective deferrals to a traditional 401(k) reduce your Box 1 taxable wages, but not your Box 5 Medicare wages, and often, this is the biggest difference between the two. Elective contributions to a Roth 401(k) do not reduce your Box 1 taxable wages. In 2019, you were limited to combined elective deferrals of $19,000, unless you were over 50 years old, in which case you could defer an additional $6,000 per year. In 2020, these amounts increase to $19,500 and $6,500, respectively.
If you work for a non-profit organization, the amount of elective deferrals into your 403(b) or Roth 403(b) plan are reported in Box 12, Code E and Box 12 code BB, respectively.
Other amounts that are reported on your W-2 can provide information regarding benefits you receive from your employer. For example, if your company allows you to participate in a flexible spending arrangement (FSA) for dependent care benefits, this amount is reported in Box 10. An FSA allows you to contribute up to $5,000 into a pre-tax account, and then use those funds to pay for daycare throughout the year. Any amounts contributed reduce your Box 1 taxable wages.
Your employer also may provide healthcare benefits to you, and if so, you may see an amount reported in Box 12, Code DD, which represents the amount of employer sponsored health coverage. This amount is not taxable to you and is not included in your Box 1 taxable wages. Depending on the type of health insurance plan you have, you may be eligible to open a Health Savings Account (HSA), a tax-efficient way to plan for your medical costs. Contributions to your HSA, either by your employer or through elective contributions by you, are shown in Box 12, Code W.
Your W-2 is an important document necessary to prepare your income taxes, but can also provide helpful information concerning your finances. You should monitor your withholdings and review to determine whether they are sufficient to cover your tax liability. If you don’t see any amounts in Boxes 10 or 12, you may be able to take actions to reduce your taxable wages by making elective deferrals to a 401(k) or 403(b) plan, contributing to an HSA for medical costs, or setting aside funds in an FSA to use for childcare costs. So this year, instead of throwing your W-2 into a pile for your tax preparer, why not take a quick look to see if you can better understand what it all means?
If you have questions about estate planning, probate, trusts, and tax matters, please contact one of Conn Kavanaugh’s experienced estate planning lawyers.
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