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02 / 10 / 2015 by Greg Freyman, CPA in Personal Tax

Understanding Your W-2 Form

The W-2 form is a document that employers must furnish to their employee(s) by the February 2nd, 2015 for the 2014 tax year. The deadline is generally January 31st, but this year it fell on a Saturday. The IRS and the State will also receive a copy of the form. Furthermore, the taxing authorities will match the information on this W-2 form with the information provided on your tax return. If there are any mismatches, depending on the error, it can automatically trigger an initial rejection of your tax return or a correspondence audit.

As a working individual, you earn income is subject to federal, state, city and payroll taxes (social security & medicare). The amount of income taxes (not payroll) that are withheld throughout the year depends on the information detailed on the federal form W-4 and state form (NYS uses form IT-2104, each state has a different form) that you completed when you commenced work for your employer. Please note that the more exemptions you claim, the less tax withheld for federal and state income tax purposes.

From a federal tax perspective (state works in a similar manner), exemptions simply reduce your taxable income. The actual number changes each year, and is indexed for inflation. For the 2014 tax year, personal exemptions are $3,950, which reduce how much taxes you will need to pay during the year. For instance, if you have four people in your family, a husband and wife with two children, the total amount that you would be able to deduct from your AGI (Adjusted Gross Income) would be $15,800 ($3,950*4). Hence, if your AGI was $60,000, this would bring your taxable income down to $44,200 ($60,000-$15,800).

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Box 1: Wages, Tips, and other compensation. This is the income you have earned up thru December 31 of the prior year. This is the amount that is subject to the federal (IRS), as well as state (not always at 100%) and possibly city (depending on where you reside) income tax.

Box 2: Federal Income Tax Withheld. This is the amount that was withheld by your employer from each pay check; and your employer remitted these amounts over to the IRS on your behalf throughout the prior year.

Box 3: Social Security Wages. As with Box 1, this is income that is subject to taxation; the Social Security tax (payroll tax).

The rate for 2014 was 6.2% (.062). However, the most that can be taxed is capped at $117,000 for 2014. So if you made $200,000, your tax would be capped at $7,254 ($117,000*.062) for 2014.

If you had two jobs and you paid too much in social security taxes, you would have the excess amount refunded to you when you file your Federal tax return. This would be reported on the Excess Social Security Tax Withheld line on Form 1040 (for 2014 line 71).

Note: The maximum number that should appear in this box is $117,000 for 2014.

Box 4: Social Security Tax Withheld. This is the amount that was withheld by your employer out of each pay check, and your employer remitted these amounts over to the Social Security Administration on your behalf throughout the prior year. Remember this amount should not exceed $7,254 for 2014 (for each W-2). Hence, if you made $80,000 for 2014, you would multiply the gross wages by the employee portion of the social security tax or exactly $4,960 ($80,000*.062).

Box 5: Medicare Wages. As with Box 3, this is income that is subject to the Medicare tax (payroll tax). The current rate for 2014 is 1.45% (.0145). However, there is no cap, and all income earned is taxable. So if you earned $600,000, your tax would be $8,700 ($600,000*.0145). The amounts here usually equal Box 1 of your W-2. If the amount in Box 5 is greater than the amount in Box 1, this means that additional income was subject to medicare taxes.  This may be due to 401K contributions and certain fringe benefits that are excluded from federal taxable income, but not for payroll tax purposes.

Box 6: Medicare Tax Withheld. This is the amount that was withheld by your employer out of each pay check, and your employer remitted these amounts over to the Social Security Administration on your behalf through-out the prior year.

Box 7: Social Security Tips. This is the amount that you reported to your employer as tip income. Normally, a cash basis taxpayer includes income when received. However, tips follow special treatment.  For instance, an employee who receives $20 or more in tips in a month must report the total tips to the employer by the 10th day of the next month [IRC Sec. 6053 (a)]. These tips are treated as paid when the report is made to the employer [IRC Sec. 451 (c)]. For example, if you received tips totaling $2,000 in December of Year 1. On January 5, year 2, you reported this tip income to your employer in the required written statement. You would report the $2,000 in year 2, not year 1.

Box 8: Allocated Tips. This is the amount of tips that your employer calculated and allocated to you, because you did not report this amount to your employer accordingly. This is a separate amount, and is not included in Boxes, 1, 3, 5, or 7. Instead, you report this amount as taxable wages on your federal form 1040 line 7 (for 2014). You must then use form 4137, to calculate and pay additional payroll taxes that were not withheld and remitted over to the Social Security Administration by your employer.

Box 9: Advance EIC (Earned Income Credit). There are basically two types of credits you may receive as a taxpayer against income tax already due. There are refundable credits, and there are non-refundable credits. If on your income tax return your federal tax is calculated, and the amount arrives to $2,000. If you have a $3,000 refundable credit, the difference is returned to you via check or direct deposit. A non refundable credit would just reduce your tax due to $0; the excess may or may not be carried forward, depending on the type of credit. The EIC is a credit that is given out by the government to help people who are in the lower income levels. You must have earned income in order to receive this credit, and pass other restrictions in order to qualify. Advance EIC is the amount that your employer pays you in advance from this credit throughout the year if you submitted form W-5 to the IRS. The amounts you received from your employer throughout the year will go against the amount you may claim on your tax return.

Box 10: Dependent Care Benefits. This is the amount that your employer reimbursed you for dependent care expenses, or it is the fair market value of dependent care services provided by your employer in designated facilities (ex: on sight daycare or offsite daycare). Amounts under $5,000 are considered non-taxable fringe benefits, and are excluded from wages subject to taxation in Boxes 1, 3, and 5. Hence, they are not subject to federal and payroll taxes. If you will claim the Dependent Care Credit on your tax return (federal form 2441), you must exclude the amount of reimbursements from total expenses claimed. For example, if your employer reimbursed you $2,500, and you spent an additional $500 for dependent care services (such as daycare), you may only claim $500 as your care expenses, on your federal and state tax returns.

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