Posted by Freddie Cook, CPA

The Right Ways to Read Your W2

The Right Ways to Read Your W2

Tax Season for this year is currently underway, with that being said several tax forms are also in process. One of these forms is the W-2, Wage and Tax Statement for employees. Regardless of how the return was being prepared by a professional or by just yourself, basic knowledge of the form is a must. 

Below is the necessary information you need to be aware of:

Each employer has a specific way of reporting an employee’s withholding and insurance requirements. That varies slightly from the receivables of independent contractors. They are also the ones who will distribute the form W2 to their employees. An empty form can be downloaded as pdf. 

Note that the issuance of the form W2 is merely limited to earned dollars and not in the length of service nor with the possessed position. Employees who earn a minimum of $600 in cash or equivalent value, as well as taxable benefits, must receive the form W2 from its employer. Employees withheld taxes such as Social Security or Medicare are still liable to have the form W-2 regardless of its earned amount. In some cases, employers will issue a form W-2 to all of its employees for convenience. So there is nothing to be worried about if you earn less than $600 dollars and still receive the form.

Each employee will receive a total of six copies of the form. To lessen the paperwork you can request an electronic copy of the form from your employer if they have the existing adequate system. Remember that employers will not send an electronic copy of the form without consent from its employees.

    •    Copy A is printed in red, unlike the other copies that were printed in black. It will be forwarded to the Social Security Administration (SSA) together with a Form W-3 (it contains the overall W2 forms from employer). In accordance with the Protecting Americans from Tax Hikes (PATH) Act, January 27 is the new due date for employers to submit the forms to SSA for the year 2020.

    •    Copy 1 will be delivered to any pertinent state, city or local tax department.

    •    Copy D will be kept by the employer.

Employees will get the remaining 3 copies:

    •    Copy B will be utilized in reporting federal income taxes and filed usually together with the federal income tax return. Except in cases where the reporting will be made through e-file, it must be submitted to the preparer but most of the time it will not be forwarded to IRS.

    •    Copy 2 will be filed with the respective taxing authorities and will be utilized in reporting your state, city or local income tax.

    •    Copy C will be your personal file. Remember to keep the said copy for 3 years minimum upon filing or the returns due date.

Taxpayer’s information will be reported on the left side of the form:

    •    Box a, is where you will state your Social Security Number (SSN). Make sure to provide the correct number by rechecking it. Placing incorrect SNN will cause you to ask another form which is W-2c from your employer to correct the issue. Do not forget that the Social Security Number should be written completely in the box because form W2 does not permit number abbreviation. 

    •    Box b is where the employer’s EIN will be stated. Employer’s EIN is equal to the employee’s SSN.

    •    Box c is where the address of the employers will be stated. It may not be the location of your workplace but must be the employer's registered address, so do not be confused.

    •    Box d is where to put the internal control number used by your employer’s payroll department. If your company does not have these control numbers, just leave the box empty.

    •    Boxes e and f are where you will place your name and your mailing address respectively. The name you will put must coincide with the actual name in your Social Security card. Furthermore, writing your address does not require any punctuation. If in case you state an incorrect address, a new form is unnecessary, contacting your employer and letting them update their records is enough.

On the other hand, dollars and codes will be reported on the right side of the form.

    •    Box 1 will provide the total of your taxable wages, tips, prizes, and other compensation, including taxable fringe benefits if any. Do not include in your total voluntary deferrals to retirement plans, before tax benefits or payroll deductions.

    •    Box 2 will state the total withheld federal income taxes from your annual salary. In identifying this value, use the options on your W-4 which rely on exemptions and any extra withholding. 

    •    Box 3 will show your total Social Security taxable income. It is computed prior to payroll deductions. If in case you belong to a high-wage earner, note that the total amount of boxes 3 and 7 must not exceed the limit of the Social Security wage base. This implies that the figure in this box will be higher or lower compared to box 1.

    •    Box 4 will provide the total withheld Social Security taxes you acquired within the year. Social Security taxes are computed based on a flat rate which is 6.2%. Therefore to be able to get the value for this box, just multiply the value in box 3 by 6.2%. 

    •    Box 5 states your total income liable to Medicare taxes. Typically, Medicare taxes comprise the majority of taxable benefits but exclude any pre-tax deductions. There is no limit on Medicare taxes.

    •    Box 6 will provide the total withheld Medical taxes you incurred within the year. Medicare taxes are also computed using a flat rate that is equal to 1.45%. Multiply the value in box 5 by 1.45% to get the value for this box. An extra Medicare Tax of 0.9% must be withheld by employers to its employees earning more than $200,000 despite its filing status or income acquired from other employers. 

    •    Box 7 is where tips that were declared to your employer will be stated. If you did not declare any tips to your employer, this box will be empty. Note that unreported tips are still subject to tax.

    •    Box 8, on the other hand, will show the reported tips that were given by your employer to you. Tips were reflected as income. 

    •    Box 9 will show a new 16-digit verification code. It will help the IRS ensure the authenticity of the form. These codes must be entered in the software when asked in case of e-filing your returns. There is no need to worry if your return form does not have these codes, it will still be processed.

    •    Box 10 is where your employer will state the total benefits you received through a dependent care assistance as well as those higher than the $5000 exemption. The excess amount that surpasses the $5000 limit, must be reported in boxes 1, 3 and 5. However, smaller than $5000 amounts are not taxable and paid through a qualified plan.

    •    Box 11 is being utilized in reporting the total non-qualified deferred compensation plan you obtained from your employer. It is subjected to tax.

    •    Box 12 is where all types of codes are shown. Bear in mind that not all the codes stated in this box are subjected to tax.

    •    Box 13 has sets of boxes. These are 3 choices for your employer to check whichever is applicable. The first box contains whether you belong to a statutory employee (employees whose earnings are subject to Social Security and Medicare taxes but not federal income tax withholding); the second box if you participated in your employer's retirement plan during the year; lastly if you received sick pay under your employer's third-party insurance policy.

    •    Box 14 is where your employer can report things like state disability insurance taxes withheld, union dues, health insurance premiums deducted and nontaxable income. If you cannot understand the value stated, contact directly your payroll or human resources (HR) department.

Lastly, the bottom of the form is where the state and local tax is reported.

    •    Box 15 contains your employer's state and state tax identification number. In case you are working in a state that does have reporting requirements, this box together with boxes 16 and 17 will be empty. However, having multiple withholding in different states requires you to fill several boxes.

    •    Box 16 will specify the total taxable income for state purposes if you are liable to state taxes.

    •    Box 17 will indicate your total withheld state income taxes obtained within the year if you happen to report your income in box16. To check whether the amount stated in this box is correct, just multiply the value in box 16 with the flat rate of your state.

    •    Box 18 will show reported income taxable to local, city, or different state income taxes. If in case you have withheld income in several states or localities your employer is required to provide you with an extra W-2 form.

    •    Box 19 will provide you the total withholding value of the amount you reported in box 18.

    •    Box 20 is where the name of the local, city or other state tax that was being reported in box 19 will be shown.

Remember that by January 27, 2020, you must have the form W-2 along with the correct information being reported.

Freddie Cook, CPA
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