Have you ever looked at your W-2, trying to understand why the various boxes have different amounts? Here are some key aspects that may help!

• Why might the amounts in Boxes 1, 3, and 5 of my W-2 be different?
• The amounts in Boxes 1, 3, and 5 of your W-2 can differ due to several reasons, including pre-tax deductions (like retirement contributions or health insurance premiums), fringe benefits (like personal use of a company car), company contributions (like Health Savings Accounts), if your employee earns tips, or if your employee is exempt from certain federal taxes. These items can affect whether certain income is subject to Federal Income Tax, Social Security, or Medicare taxes.
• How do pre-tax deductions like 401(k) contributions affect W-2 box amounts?
• Pre-tax deductions, such as 401(k) contributions, reduce the amount reported in Box 1 because these contributions are not subject to Federal Income Tax. However, they are usually still subject to Social Security and Medicare taxes, so the amounts in Boxes 3 and 5 will reflect the gross wages before the 401(k) deduction. For instance, if an employee makes $75,000 and contributes $10,000 to a 401(k), Box 1 would show $65,000, while Boxes 3 and 5 would show $75,000.
• How do pre-tax insurance plans (like cafeteria 125 plans) affect W-2 box amounts?
• Pre-tax insurance plans, such as health insurance premiums deducted under a Section 125 cafeteria plan, reduce the amounts in Boxes 1, 3, and 5. This is because these deductions are exempt from Federal Income Tax, Social Security, and Medicare taxes. For example, if an employee makes $75,000 and contributes $5,000 to a health insurance plan, Boxes 1, 3, and 5 would each show $70,000.
• How do taxable fringe benefits, like Personal Use of Company Car (PUCC), affect W-2 box amounts?
• Taxable fringe benefits can increase the amounts in one or more of the W-2 boxes. These benefits are subject to some federal taxes, even though the employee may not have received the money on their paycheck. For example, if an employee makes $75,000 and has $5,000 of PUCC, Box 1 might show $75,000 (if the employer chooses to exclude the PUCC from Federal Income Tax), while Boxes 3 and 5 would each show $80,000 (as PUCC is subject to Social Security and Medicare).
• How do tips affect W-2 box amounts?
• Tips are included in the amounts in Boxes 1 and 5. The amount of tips is separated out in Box 7 for Social Security. For example, if an employee makes $40,000 in regular pay and $10,000 in tips, Box 1 will show $50,000, Box 5 will show $50,000, Box 3 will show $40,000, and Box 7 will show $10,000.
• What if an employee is exempt from Social Security and/or Medicare taxes?
• If an employee is exempt from Social Security and/or Medicare taxes (e.g., certain visa holders), the amounts in Boxes 3 and/or 5 will be lower than Box 1. In some cases the amount can be zero. If an employee makes $50,000 but is exempt from Social Security and Medicare, Box 1 will show $50,000, while Boxes 3 and 5 may show $0.
• Where are pre-tax insurance deductions reported on the W-2 form?
• Pre-tax insurance deductions, such as those under a Section 125 plan, are not reported in Boxes 12 or 14 of the W-2. The reduction in taxable wages is reflected directly in the lower amounts reported in Boxes 1, 3, and 5.
• What’s the difference between an employee being “exempt” from federal taxes and claiming “exempt” on their W-4?
• An employee who is truly “exempt” from federal taxes is exempt per IRS rules (e.g., due to their visa status or clergy status). This is different from an employee who claims “exempt” on their W-4. In the latter case, the employee is still subject to Federal Income Tax, and their pay is included in Box 1 on the W-2. Claiming “exempt” on the W-4 means no federal income tax is withheld from their paychecks.