The Planner's Perspective: Decoding Your W-2

Paul Morrone |

By Paul Morrone CFP®, CPA, MSA

The W-2 is one of many tax documents that working individuals receive, and in many cases, they are widely misunderstood. Your W-2 contains information not just about your earnings and taxes, but your retirement plans and employee benefits as well. Understanding the common numbers displayed on the form can give you a better understanding of the benefits your receiving as well as what your total compensation looks like.

Below is a listing of the key components of your W-2 and what they mean to you:

  • Box 1: This your gross income which transfers to line 7 of your 1040 as ‘wages, salaries, tips, etc.’
    • This is generally calculated as your total compensation, less deferrals to retirement accounts (401(k), 403(b)) and Health Savings Accounts (HSAs)). Also included in the value of this box can be payments from exercised stock options, vesting of RSUs, payments of deferred compensation, and other receipts from nonqualified compensation plans.
  • Box 2: This is the total amount of Federal Income Tax withheld from your paychecks over the course of the year.
    • Remember, this amount is only an estimated amount, the purpose of filing your tax return is to determine what you actually owe!
  • Box 3: This field shows the total amount of your wages subject to social security taxes. If the amount in Box 5 is over $127,200 (the 2017 wage limit), then this box will show $127,200.
    • Remember, retirement plan contributions ARE subject to Social Security and Medicare taxes, but are deferred from federal income tax until withdrawn from the account.
    • If you do not pay into social security because you are covered by a public pension (i.e. teachers in certain states) you may see a zero in this box.
    • HSA contributions are not subject to Social Security taxes OR Medicare taxes if deferred through your payroll or paid by your employer, hence these amounts will not be includable in the values shown in Boxes 1, 3 or 5.
  • Box 4: Amount of Social Security taxes withheld from your paycheck, also known as the Old Age, Survivors and Disability Income taxes (OASDI).
    • Calculated as 6.2% of the amount in box 3.
  • Box 5: Shows your compensation subject to Medicare taxes
    • Generally, this is a total of all your compensation.
  • Box 6: Amount of Medicare tax withheld from your paycheck
    • Calculated as 1.45% of the amount in Box 5.
    • Wages over $200k (single) and $250k (joint) are subject to an additional Medicare tax of 0.9%.

Boxes 11, 12, 13 and 14 generally relate to employee benefits and retirement plans.

  • Box 11: Shows total compensation paid from a nonqualified deferred compensation plan.
  • Box 12: Can contain multiple codes that represent a myriad of numbers, the most common are as follows:
    • Code C – taxable cost of group life insurance over $50,000
    • Code D/E/G – employee deferrals into a 401(k) plan/403(b) plan/457(b) deferred compensation plan
    • Code V – income from stock option exercise
    • Code W – employer contributions into HSA accounts (includes employee deferral amount, if applicable)
    • Codes AA/BB – employee deferrals into a ROTH 401(k)/403(b) plan
    • Code DD – nontaxable cost your employer paid towards your health insurance
  • Box 13: Indicates an employee’s eligibility for participation in an employer’s retirement plan. This informs your tax preparer that certain limitations may apply to the deductibility of IRA contributions.
  • Box 14: This is where your employer may report other information pertinent to preparing your tax return.
  • Boxes 16-20: This shows state and local wages that you earned during the year and the applicable state to which the earnings pertain to. It will also show how much tax was withheld and remitted to each state/local jurisdiction. If your job required travel to more than one state, you may receive multiple W-2 forms, one for each qualifying jurisdiction.

Hopefully after reading this, you’ll look at your W-2 in a new light. At the very least you should have a better understanding of what the numbers and codes mean to you and how they affect your tax return.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.US Wealth Management, US Wealth Management New Haven, US Financial Advisors and LPL Financial do not offer tax advice or services.