IRS Form W-2: What Every Taxpayer Needs to Know

By Dan Caplinger Markets Fool.com

Every year, tens of millions of American employees receive IRS Form W-2. This tax form is deceptively simple, but it holds the key to essential facts that you'll need in preparing your 2016 tax returns. If you haven't already gotten your W-2, you can expect it within the next week or two, and once you have it, you'll need to know to use the information on the W-2 to help determine your gross income and your final tax bill. Below, we'll go through the W-2 box by box to give you a quick guide on how to use it.

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Image source: IRS.

Box 1: Wages, tips, other compensation

The first item on Form W-2 gives you the amount of federal taxable income you'll need to include on your tax return. The number in Box 1 accounts for deductions and exclusions from income, such as 401(k) contributions or payments for the employee share of health-insurance premiums. This number typically goes directly on the wages line of your return.

Box 2: Federal income tax withheld

Box 2 shows how much money your employer withheld from your paycheck to go toward federal income taxes. You'll need this number after you calculate your total tax bill because you'll get credit for the money that was already taken to go toward your taxes. If this number is higher than your eventual tax liability, you'll get a refund.

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Box 3: Social Security wages

This number reflects what Social Security counts as wages. It will only occasionally differ from what's in Box 1. First, if you have items like 401(k) contributions that are deductible for income tax purposes but not for Social Security taxes, then Box 3 will be higher than Box 1. Second, if you work in a public-sector job that isn't subject to Social Security, then Box 3 might be either zero or blank. And finally, if Box 1 was more than the wage base limit for Social Security taxes, which was $118,500, then Box 3 will be no greater than $118,500.

Box 4: Social Security tax withheld

This box shows how much money the IRS withheld for Social Security payroll taxes. Usually, the number won't be important unless you work more than one job and earn more than the wage base limit for Social Security taxes in a given year. If that's the case, you'll need this number in order to calculate how much money you'll get back for excess withholding.

Box 5: Medicare wages and tips

Like Box 3, income calculations for Medicare tax purposes are different from Box 1 calculations. However, unlike Social Security, there's no upper limit on Medicare tax, and even public employees who are exempt from Social Security often contribute to Medicare.

Box 6: Medicare tax withheld

This box shows how much you paid in Medicare tax. This is rarely important for federal tax purposes, but some states use the figure on state income tax returns.


Image source: Getty Images.

Box 7: Social Security tips

If you work at a job in which you receive tips, you'll be asked to report your tip income to your employer. This box has the number you've reported.

Box 8: Allocated tips

Some large employers in the food and beverage industry are required to allocate tips to their employees. This box has the allocated amount.

Box 9

In a strange-looking move that the IRS often makes, Box 9 is always left blank.

Box 10: Dependent care benefits

If your employer provides benefits under a dependent care-assistance program, then that amount will appear in Box 10. In addition, if you have access to a flexible spending account for dependent care and you make pre-tax contributions to the FSA, those contributions will appear here, as well. Money spent on eligible expenses is tax free, so this amount is typically excluded from wages in Box 1.

Box 11: Nonqualified plans

This number represents distributions from nonqualified retirement plans, which represent money earned in previous years, but on which tax was deferred. Any amount here will typically also be included in Box 1.

Box 12: Codes

This box is a catch-all for many different tax provisions, which is why there are multiple lines for the box. Among the most common items you might see here are 401(k) contributions under code D and the cost of employer health coverage under code DD. For a full list of codes, see this IRS website.

Box 13: Checkboxes

Three checkboxes are included in Box 13. Independent contractors who are treated as employees by law are referred to as statutory employees. The retirement plan box will be checked if you had access to a 401(k) or similar employer-sponsored retirement plan. Finally, some employees are eligible to receive nontaxable sick pay from third parties, in which case this box will be checked.

Box 14: Other

This box is available for any other information employers need to give employees. Anything that appears here should be labeled to explain its purpose.

Boxes 15 through 20: State tax information

Finally, Boxes 15 through 20 have state and local tax information. Requirements and treatment vary from state to state, but you can typically use this information on your state income tax return.

IRS Form W-2 can look confusing, but it has a lot of important information you'll need to file your taxes. This guide should help you understand your W-2 better and ensure you won't miss out on tax benefits that you should get.

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