What is a W2 Form?

“What is a W2 Form?” is a common question amongst employees. Chances are, if you are earning a legal living in the United States, you have encountered a W-2. Few, however, take a deep look at each section of this ubiquitous document, often to their detriment. Having an understanding of the breadth of the document you are filling out prior to filing it with a government agency is very important.

Although most employers generally follow the guidelines set forth by the Internal Revenue Service in regards to filing and documenting corporate tax returns and the distribution of income information to their employees, it is important to be aware of the intricacies of the forms to protect oneself from any fraud, intentional or otherwise.

W-2 Wages and Withholding

Form W-2 is, at its core, a tool the Internal Revenue Service utilizes to file your state, local, and federal taxes. The IRS requires all employers to provide six copies of a W-2 to their employees by the end of January for the previous year’s taxes. The W-2 contains information regarding your total earned wages and the deductions made for taxes throughout the taxable year, including local, state, and federal. The accuracy of this information is extremely vital for tax purposes. A W-2 is necessary when an employer pays an employee more than $600 within a fiscal tax year.

The IRS compares their numbers to that of the employer, and the total amount of federal taxes removed from the paychecks of an employee is matched against the actual tax bill computed by the IRS itself. Any difference, whether under or overpayment, is addressed by filing your income taxes, generally due by April 15 of the following year. Overpayment results in a refund, underpayment results in a bill. The employer is legally obligated and ultimately required to mail this documentation to the employee in order to provide ample time to file their income taxes.

Any discrepancies between your reported earnings on your income taxes and the amounts reported by your employer on the W-2 will set off red flags within the IRS, and they will definitely attempt to seek out why such a difference occurred. The IRS matches the returns of employees against the corporate return of the employer and attempts to reconcile any differences. Failure to report a tax return to the IRS in light of them having received a corporate return will prompt swift communication from the agency. They do not take kindly to tax evasion or fraudulent practices.

Note that a W-2 is completely different (although ultimately dependent on) a W4 form, which is generally filled out prior to employment. A W-4 determines the amount of taxes withheld, based on your claimed dependents, marital status, etc. Also note that contractors, sub-contractors, and freelancers may be issued a Form 1099-MISC in place of a W-2, which is specifically made to account for income from several invoiced sources, and that they are NOT considered employees. This is one of many kinds of 1099 forms, which denote various forms of taxable compensation paid to an individual in a given year that are NOT considered wages or tips (well, except for allocated tips, but more on that later…) such as capital gains, dividends, stock gains, etc.

Having multiple W-2’s from working multiple jobs is becoming more and more commonplace in America, and will be especially prevalent in young workers. It is extremely important to have all the facts straight and to have all the information on the disparate forms to be accurate to prevent future frustrations with the Internal Revenue Service.

If adequate record-keeping measures are not taken, a business owner or employee can easily find themselves in a difficult legal situation. It’s incredibly crucial for all individuals to familiarize themselves with any tax or legal documents they may be using to their utmost abilities.

Importance of Your Tax Withholding

Arranged as a series of variously sized, labelled boxes, this form is designed to show the year’s total tax that your employer withheld from your paychecks. The Internal Revenue Service requires several periodic payments of taxes over the course of the year, and generally speaking the employer assumes that responsibility. The W-2 issued by the IRS should align with what they have removed from your earnings. Every W-2 is essentially the same, with the only difference being the tailoring of the given information to reflect the specific taxable numbers of the federal, state, and local returns. Every employer issues the same standardized W-2.

To the upper left side of the document are the identification features of the W-2, functioning as a tracking system. Box A contains the employee’s Social Security number. To make sure the tax return is completed on time, it is prudent to double-check your information in this section for accuracy.

Employers are given a unique Employer Identification Number, or EIN, and it basically functions as the business entity’s Social Security number. On the W-2 for the state income tax return, this number may be a state issued ID number. Box C contains the address of your employer that is listed as it’s official legal address. There is a good chance this may be different than the actual address of the location in which the employee worked.

Box D contains the control number used by the accounting or payroll department of the corporation or business, but isn’t always used and is often blank. Boxes E and F contain the employee’s information, and again, it is very wise to double-check and make sure this information corresponds accurately to that which is affiliated with your Social Security number to prevent delays.

The remaining portions of the W-2 reflect the wages, tips, earnings, or otherwise numerically quantified payments for services paid from the employer to the employee within the given tax year.

Box 1 depicts the total amount of earnings for the tax year that were paid by the employer to the employee, and will be the same amount for both federal and state returns, minus a few specific deferrals, if any. This number does not include any pre-tax benefits such as life insurance, 401(k), etc.

Box 2 depicts the amount of federal or state taxes the employer withheld from the employee and paid to the IRS, calculated from the information given on the Form W-4 upon hiring, and depending on which of the copies of the W-2 is being read. Also noted is the amount of earned tips , if the profession in question is one in which cash tips are taxed.

Boxes 3 and 4 reflect how much of your wages are subject to the Social Security tax and the amount your employer withheld. Since only a segment of your wages are subject to the Social Security tax, it is often much less than the federal amount. Furthermore, unlike federal or state taxes, the Social Security tax is based on a flat rate, currently 6.2 percent.

Boxes 5 through 8 reflect further withholdings in regard to Social Security and Medicaid, and how much of any tips earned may be subject to their applicable taxes. The amount of an employee’s income subject to the Medicaid tax is listed in Box 5. Box 6 refers to the amount taxed for Medicare, and like Social Security, is calculated at a flat rate (1.45 percent), and caps out at $118,500. Box 7 contains any tips received in the year and when combined with Box 3, should add up to the total in Box 1. Box 8 contains any allocated tips. Allocated tips, however, are not considered in the preceding totals of Boxes 1, 5 and 7, and usually, this box requires an additional 1040 form to reconcile.

Box 9 is now empty in contemporary tax returns, but prior to 2009 it contained information regarding Earned Income Credit and will be removed in future iterations of Form W-2.

Box 10 contains any deductions for dependent care benefits, which would be included in the employer’s benefit package, such as a flexible spending account, but generally aren’t taxed unless they exceed $5,000. Examples include employee sponsored day care, disability services, matched spending accounts, specialized treatment and care benefits, etc.

Box 11 is technically already considered in Box 1, but it refers to the amount of compensation that was deferred, but from a non-qualified plan or source.

Box 12 is sort of similar to a “miscellaneous compensation” box and has been simplified to read as a code given to your employer to denote a specific type of compensation. Some of these codes are:

  • A – denotes an uncollected Social Security or RRTA tax on tip income (same as the letter M, only M refers to former employees only)
  • B – refers to an uncollected Medicare tax on tip income (same as N, although N refers
  • C – although included in wages in boxes 1, 3, and 5, this refers to the taxable cost of group-term life insurance, but only over $50,000
  • D – H – refer to various specific elective deferrals
  • J – refers to Nontaxable sick pay
  • K – refers to the 20 percent excise tax on excess ‘golden parachute payments’
  • L – verified employee business expense reimbursements
  • M – (see A)
  • N – (see B, but only over $50,000, and for former employees)
  • P –moving expense reimbursements, paid already to moving employee
  • Q – Nontaxable combat pay
  • AA, BB, and EE refer to various designated Roth contributions,
  • DD – denotes the cost of employer-sponsored health coverage

Box 13 contains three checkable boxes, which will be marked if any of the following situations apply to your employment tenure: A Statutory Employee is one whose income qualifies for the Social Security and Medicare tax, but does not get taxed in regard to federal taxes. Retirement Plan will be checked if the employee participated in the employer’s retirement plan, and Third-Party Sick Pay will be checked if the employee was paid by the company’s third-party insurance provider.

Box 14 contains any other information not specifically covered in the other boxes, and acts as a “catch-all” space often left blank intentionally.

Box 15 through 18 reflect a similar breadth of information as the above federal boxes, but in regard to the taxes withheld for state tax purposes, while Box 19 contains any information regarding local taxes, borough taxes, or other fees and withholdings from the fiscal year not covered by federal or state levels.

Box 20 refers to the legal name of the local, city or other state in regard to the tax being reported in Box 19 and may also contain information regarding state disability payments.

Most people who receive a W-2 can fill out their tax returns online and save time and money from having to seek professional assistance. However, if you have multiple W-2’s, or a W-2 with many of the boxes of alternate deductions and withholdings demarcated, it is often best to seek the advice and counsel of a professional accountant or tax expert.

Knowing the ins-and-outs of a complex form like a W-2 is integral for accurate income tax information. There’s nothing like a minor clerical error causing dozens of hours of frustration because an employee didn’t glance over his W-2 for errors. Although most companies and corporations are legally obligated to provide you with assistance and information regarding your taxes, it is ultimately up to you, the employee and taxpayer, to be responsible for your documentation.

All told, business owners, employees, and everyone in between would do well to familiarize themselves with the various ins and outs of the W-2 form, as well as its many purposes in the business, tax, and financial worlds.

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