How to Understand Your W-2 Tax Form from Your Employer

Each year from January through April most Americans know that it’s time to start preparing tax returns, many call this time frame Tax Season. This is a time of year that can often bring stress and confusion, but having a good grasp of key documents like a W-2, a 1099, or a 1040 can make the process smoother. In this article, we’ll break down the W-2 Tax Form, which is essential for filing your federal, state, and local taxes, as it provides a summary of your earnings and taxes withheld.

What is a W-2 Form?

A W-2, officially known as the “Wage and Tax Statement,” is a document employers must provide to their employees at the end of each tax year. It reports your annual earnings, and the amount of taxes withheld from your paycheck for federal, state, and local governments.

If you worked as an employee during the year, your employer should provide your W-2 by January 31 of the following year. If you haven’t received it by early February, you should contact your employer or payroll department to ensure it was sent.

However, if you work as a freelance, or independent contract worker, you are likely to receive a 1099 form from each company or corporation that you work for. That’s because you are not considered an employee of the company but rather a 3rd party independent contractor.

It is also possible that you could receive both types of documents if you have multiple types of jobs. When you work as a permanent full-time or part-time employee, you will receive a W-2 from that employer. And, if you work a “side job” doing freelance work, you could also receive 1099 forms from each company for which you provide a service.

Breaking Down the W-2 Tax Form

The W-2 may seem overwhelming, but it has been divided into clearly labeled boxes with specific information. Here’s what each section means:

Box 1: Wages, Tips, and Other Compensation

• This shows your total taxable income for the year, including wages, tips, and bonuses. This is the amount of money designated as your salary, or hourly wage before any taxes or benefits were taken from your paycheck.
• Note: this figure might differ from your gross pay if you contributed to pre-tax benefits like a 401(k), retirement, health insurance, or health savings account.

Box 2: Federal Income Tax Withheld

• This is the total amount of federal income tax your employer withheld from your paychecks throughout the year. This number will be used to calculate whether you owe additional taxes or qualify for a refund.

Boxes 3 & 4: Social Security Wages and Tax Withheld

• Box 3 reports the amount of your income subject to Social Security tax, and Box 4 shows how much was withheld. For 2023, Social Security tax applies to wages up to $160,200.

Boxes 5 & 6: Medicare Wages and Tax Withheld

• These boxes report your income subject to Medicare tax (Box 5) and the amount withheld (Box 6). Unlike Social Security, there’s no income cap for Medicare tax.

Box 12: Codes for Additional Compensation or Deductions

• This box includes a variety of codes indicating contributions or benefits, such as retirement plan contributions (e.g., 401(k)), health savings accounts (HSAs), or employer-provided benefits like dependent care assistance.

Box 13: Retirement Plan Indicator

• If you participated in an employer-sponsored retirement plan, this box will be checked. This information can affect your ability to deduct contributions to an IRA.

Boxes 15-20: State and Local Taxes

• These sections report income earned in specific states and localities, along with taxes withheld for those jurisdictions.

How to Use Your W-2 Tax Form

Your W-2 tax form is essential for completing your tax return. When you file your taxes, you must report the income and tax withholding amounts listed on your W-2.

If you have worked for multiple employers during the year, you will receive a separate W-2 from each one. Make sure you include all of your W-2 forms when filing your tax return to prevent any discrepancies or potential audits. For your filing you will need to add together the amounts for each of the W-2 tax forms that you receive including those of your spouse if you file as married filing jointly.

Additionally, you should keep your W-2 forms for a minimum of 3-7 years. If your tax return is audited the IRS will want to see the forms used for the return. They can audit returns for up to 3 years after the return is filed.

There are other times when you may need information from these forms. For example, when applying for a mortgage loan, or other high-finance loan a bank will need proof of your income. A W-2 or pay stub would be used for that purpose. They often request these forms for 2 consecutive years.

The Importance of Reviewing Your W-2

Before filing your taxes, take the time to review your W-2 carefully. Ensure the information matches your records, including your Social Security number, employer details, and income. Any discrepancies should be addressed promptly to avoid delays or complications with your tax return.

Common Questions About the W-2

Why doesn’t Box 1 match my total pay?

• Pre-tax deductions, such as contributions to retirement plans or health insurance, and health savings accounts reduce your taxable income and are excluded from Box 1.

What if there’s a mistake on my W-2?

• Contact your employer immediately if you notice errors. They can issue a corrected form, known as a W-2c.

What happens if I lose my W-2?

• Request a duplicate from your employer. If you can’t get one in time, the IRS allows you to file using Form 4852 as a substitute for your W-2.
• Also, many companies can issue a digital form in addition to your paper form. These are acceptable to the IRS.

Understanding your W-2 tax form can save you time, stress, and even money. By familiarizing yourself with the document’s layout and contents, you’ll be better equipped to handle your taxes. Whether you use a tax professional, or software, or file manually, your W-2 is the cornerstone of your tax filing process.

With a little attention to detail, you can approach tax season with confidence and peace of mind.

This information is not intended as legal or tax advice. Cowdery Tax and its representatives does not offer legal or tax advice. We offer services for business bookkeeping, payroll, tax payments, and personal tax filings. We share information that is publicly available. Tax laws may change with or without notice that may alter or change the information contained in this publication.