Form W-2, Wage & Tax Statement [how to read & use it]

It's that time of the year when you start receiving multiple tax forms sent your way to equip you with the information you need to report on your tax return.

Form W-2 is one such form that will arrive at your doorstep if you worked as an employee during the previous year.

In this article, you will learn what it is, how to read the information it reports, and what are the tax consequences.

What is Form W-2?

So, W-2 Form definition and explanation first:

Form W-2, Wage and Tax Statement is a tax form that your employer files with the IRS and is mandated to send you a copy that mainly reports annual wages and the amount of withheld social security and Medicare taxes.

Every employer must file a W-2 Form with the IRS for each employee on their payroll including the employees who are related to the employer.

For instance, John has set up a trucking business and asked his wife Lucy to help him as a general manager. He also employed James, a truck driver. John is required to file a W-2 Form for both James and Lucy.

What's new in 2024

For 2024, the IRS will impose higher penalties on employers if they fail to file and furnish W-2 that are due after Dec 31, 2023. However, employers operating in disaster zones are exempted.

IRS has also announced disaster tax relief for the victims of flooding, severe snow storms, mudslides, and landslides. The extended time period also applies to other time-sensitive acts.

This means if you reside and work for an employee in the disaster zone you might receive your W-2 Form late.

The IRS has also provided the option of claiming disaster-related casualty losses including personal property losses not covered by insurance or other reimbursements.

Who receives a W-2 Form?

Almost every individual, who is hired as an employee and gets a paycheck from their employer, will receive a W-2 Form.

Example. Consider Emma who is hired as a senior accountant by an accounting firm. To determine how the payments made for her services will be treated, the business relationships between Emma and the firm have to be considered.

The IRS states that:

Let’s say Emma works from Monday to Friday from 9:00 am to 6:00 pm. The lead accountant approves her appraisals and the customer she serves belongs to the firm. Because of her expertise, she requires minimal supervision.

Last month she received a bonus for closing in as an accounting customer and the firm pays for her health insurance. Emma is an employee of the accounting firm.

Also - If there is confusion regarding the worker's status then Form SS-8 can be filed with the IRS either by the business or the worker.

NOTE! It can take a minimum of 180 days to get the determination.

What happens if workers are classified incorrectly?

Incorrect worker classifications have consequences for businesses which will depend on the basis of classification:

• The unreasonable basis for classification: In this case, the employer may be held liable for the employment tax.
• Reasonable basis for classification: In this case, the employer may be relieved from having to pay employment taxes.

If you have a reason to believe that your employer has misclassified you as an independent contractor use Form 8919 to compute and report your uncollected employment taxes.

You will need to use the information in W-2 Form to file your tax return. It reports information in addition to your withheld taxes such as your allocated tips, how much contribution is being paid to your health insurance, etc.

How to read Form W-2?

Upon glancing at a W-2 Form you received from your employer, you spotted boxes with letters and numbers, right?

Let’s look at what they mean.

1. Lettered Boxes

The lettered boxes show you and your employer's identification information.

Box A shows your Social Security Number (SSN). If you submitted Form SS-5 to get the SSN and are still waiting for it, your employer will enter “Applied for” in this box.

❗Pro Tip: Inform your employer as soon as you receive your social security card so they amend the previously reported information by filing W-2c.

Box B shows the Employer identification number (EIN) assigned to your employer.

Box C has details about your employer’s official registered address.

Box D shows the control number with which your employer identifies your unique form W-2 in their record.

Box E has your first and last name.

Box F has your complete address with city and zip code.

❗Pro Tip: If you have recently moved, provide your new address in the tax return and update your employer.

2. Numbered boxes

The numbered boxes record your financial information.

Box 1 reports the total wages, tips, and other compensations you received during the year. It includes wages and benefits such as fringe benefits, total tips excluding allocated tips, etc.

Box 2 shows the total federal income tax withheld from your paycheck. If you receive a parachute payment an additional 20% of excise tax will be included.

Golden parachutes, also known as "poison pills", are the payments offered to key executives to minimize resistance when a takeover happens and the new regime wants to terminate them.

Box 3 reports total wages before payroll deduction subject to social security tax excluding social security tips and allocated tips.

❗Pro Tip: Ensure the amount shown in this box doesn’t exceed the social security wage limit which is $160,200 for 2023 by the IRS. If it does then ask your employer to correct it.

Box 4 reports the employer's share of the total amount of social security tax withheld on wages and tips. The amount in the box should not exceed $9,932.40 as this is the maximum tax that can be withheld as shown below.

•  Max social security tax withheld = social security wage limit * social security tax rate

•  Max social security tax withheld = $160,200 * 6.2%

•  Max social security tax withheld = $9,932.40

❗Pro Tip: You may be eligible to claim a refund on your tax return if you paid more social security tax and this can happen if you worked two jobs during the year.

Box 5 reports the Medicare wages and tips. This is generally similar to what is subject to social security tax. The only difference is there is no wage base limit.

Box 6 reports the total medicare tax withheld including the additional Medicare tax. Your employer is required to deduct additional Medicare taxes at 0.9% if they pay you in excess of $200,000 regardless of your filing status.

❗Pro Tip: You should either make an estimated tax payment or request additional income tax withholding on W-4 Form if you owe more in additional medicare taxes depending on your individual filing status and earnings.

Box 7 shows the tips you reported to your employer so if you didn’t report any tips this box should be blank.

❗Pro Tip: When you add up boxes 3 and 7 it shouldn’t exceed the maximum social security wage base which is $160,200 for 2023.

Box 8 records allocated tips. Your employer must allocate tips only if:

• The total tips you reported to your employer are less than your share of 8% or an approved lower rate of the gross receipts for that period excluding non-allocable receipts.
• You worked in a large food and beverage establishment.
• You received tips directly from the customer.

❗Pro Tip: Allocated tips are not included in your wages reported in boxes 1,3,5, or 7, and no tax is withheld on this income so you must report it on your tax return. Additionally, you have to compute your social security and medicare taxes on allocated tips using Form 4137.

Box 9 is grayed out since the reporting requirement expired years ago.

Box 10 shows any amount paid to you by your employer under a dependent care assistance program such as the daycare facility.

The amount can be directly paid to the facility or reimbursed to you and it won’t be taxable unless it exceeds $5,000 but you have to report it on Form 2441.

❗Pro Tip: If the care provider is your household employee, you may owe employment taxes.

Box 11 records the deferred compensation you received from the employer in a non-qualified or non-governmental retirement saving plan. They are typically designed to meet specialized retirement needs.

This is not a deductible business expense for your employer and as an employee, it is your taxable income but you are allowed to defer taxes until retirement.

Box 12 reports multiple compensation and benefits. To simplify it the IRS has allowed your employer to enter a single or double-letter code followed by the compensation paid to you.

Box 13 has the following 3 checkboxes the ones that are applicable to you would have been checked by your employer:

• Statutory employee;
• Retirement plan;
• Third-party sick-pay.

NOTE! Some independent contractors under common law rules are treated as statutory employees for certain employment tax purposes if they fulfill certain conditions.

Box 14 is used by your employer for any other information they want you to know as their employee such as:

• State disability insurance taxes withheld;
• Union dues;
• Uniform payment;
• Educational assistance payment.

Box 15 through 20 are used by your employer to report state and local income tax information.

Form W-2 preview

 

 

W-2 vs. 1099 vs. W-4 Forms (what’s the difference)

The forms you receive as a worker and the forms you need to fill and file depend on whether you are an employee or an independent contractor.

Form W-2

W-2 is used to report employment income. As an employee, you get paychecks consistently with other employment benefits and your employer is required to withhold W-2 taxes i.e. social security and Medicare taxes, and remit them to the IRS.

At the end of the tax year, you receive a W-2 Form so you don’t have to worry about keeping records of your employment income because your employer does.

Form 1099

1099 is used to report non-employment income. When self-employed people provide their services worth more than $600 they will receive form 1099 from the businesses that hired them.

Since self-employed people are independent contractors and service providers they are responsible to report their income. They are also liable to pay social security and Medicare taxes.

Also, they are not entitled to any benefits that are offered to employees.

Form W4

When you land a new job your employer will ask you to fill out Form W-4 the employee's withholding certificate and the information you provide in this form will determine how much taxes your employer will withhold from your paycheck.

Pro Tip. Review your withholding tax annually to ensure the correct amount is being withheld.

Specific instructions for Form W-2

While preparing your W-2, make sure to take note of the following top popular and frequent special points:

Multiple W-2s

You might receive multiple W-2s if you worked 2 jobs during the year. Add up the amounts reported in each W-2 form and enter the total on your tax return.

Pro Tip. When you file your taxes the amount of withheld taxes is deducted from your gross tax obligation and if you paid more than you owed, the IRS will issue a refund.

Reconciliation

Your employer also submits a W-2 form to the IRS and they use it to keep track of your employment income and tax liability.

Pro Tip. Ensure the employment income you report on your tax return reconciles with the amount reported on your W-2. If it doesn’t then it might trigger a tax audit.

Income from multiple sources

Form W-2 only reports your employment income.

Pro Tip. If your side hustle is generating income or you receive the rental income you need to report them on relevant forms and compute your tax liability.

Cafeteria plan

Your employer may ask you to choose benefits from the cafeteria plan, alternatively known as the flexible benefits plan or section 125 plan.

The IRS states that:

The good thing about this plan is that you can look through the options and select the one that suits your circumstances. You will find options such as:

• Dependent Care Assistance;
• Health savings accounts (HSAs) including long-term care services;
• Group-term life insurance coverage;
• Adoption assistance.

Pro Tip. If you have a choice between taxable benefits then that is not a section 125 plan.

When should you receive your W-2 Form?

The information within W-2 is crucial and you need it to file your tax return.

When do employers send out a W-2?

The IRS requires your employer to furnish you with the employee W-2 Form by January 31st.

It will be considered furnished if the form is mailed on or before the due date. It may not arrive at your door on the same date.

Your employer can request an extension and if approved they will generally have additional 15 days from the due date to send you a copy of your W-2.

The time period can be extended to 30 days if the employer has a genuine reason to ask for it.

When are W-2s due if your employment ended?

Let’s say your employment ended sometime before Dec 31st. Your employer might send you a copy at any time but it has to be done before Jan 31st, of the following year.

Your employer has 30 days to furnish you with Form W-2 either upon your request or within 30 days of your final wage payment whichever is later.

NOTE! Reading W-2 and figuring out which information goes where in your tax return can be complex at times.

Our expat tax pros ensure you have “smooth sailing” when it comes to reading and reporting the content of your W-2 Form.

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