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Understanding Your W-2 Form

For many folks, the W-2 form is the backbone of the tax return. In order to prepare a correct tax return, it's important that you read and understand the information reported on your W-2 form. And this is true regardless of whether you prepare your own tax return or engage the services of a professional. Here are some things that you should know about your W-2 form.

Make sure to verify that your name, address and Social Security number (SSN) are all correct. And make especially sure that your name and SSN match your Social Security card. If you've undergone a name change (usually because of marriage), make sure to notify the Social Security Administration (SSA). If you don't there is a very likely chance that your return will be altered, your filing status changed, and your refund adjusted by the IRS. You can contact the folks at the SSA online at www.ssa.gov.

Box 1 -- Wages, tips and other compensation: This box includes both cash and non-cash compensation (such as taxable fringe benefits). Basically, this is the amount that you'll report on your federal income tax return as compensation. But "other compensation" could include items that require special treatment on your tax return. Basically, this is the amount that you'll report on your federal income tax return as compensation. Some of those items include:

  • Payments of non-deductible moving expenses.
  • The cost of accident and health insurance premiums for 2% or more shareholders paid by an S corporation.
  • Employee contributions to a Health Savings Account.
  • Employee contributions to an Archer MSA Account.
  • Certain reimbursements for employee business expenses if the employer uses a non-accountable method of accounting for business expenses.

Box 3 -- Social Security Wages: This box reports the total wages paid to you subject to Social Security tax. It does not include Social Security tips and/or allocated tips. Remember that Social Security wages can differ from the taxable wages shown in Box 1 because of items subject to Social Security taxes but not subject to income taxes (such as deferred compensation contributions). The amount of the Social Security wages plus the Social Security tips shown in Box 7 should not exceed the 2004 wage base amount of $87,900. If they do, be sure to bring this to the attention of your employer.

Box 4 -- Social Security Tax Withheld: This box shows the total Social Security tax withheld. For 2004, this amount should not exceed $5,450. If one employer withholds too much Social Security taxes, you should request a refund from your employer. But if you have multiple W-2 forms, and the total of your Social Security taxes withheld (on all of the W-2 forms) exceeds $5,450, make sure to claim the excess as additional withholding on line 66 of Form 1040.

Boxes 5 and 6 -- Medicare Wages and Withholding: These boxes are similar to Social Security wages and withholding, except that there is no maximum amount, either for wages or withholding, for Medicare.

Box 7 -- Social Security Tips: This box indicates the total amount of tips reported to your employer and also included in your total income (Box 1).

Box 8 -- Allocated Tips: If you have an amount in this box, you've got additional work to do and additional income to report. These are tips that were "allocated" to you because the employer didn't report sufficient tip income for his employees. If you have an amount in this box, it should be added to the amount in Box 1 and reported as additional compensation. Also, you'll need to complete IRS Form 4137 in order to report and pay the additional Social Security and Medicare taxes on these allocated tips.

Box 9 -- Advance EIC payments: This box indicates the total Earned Income Credit (EIC) that you received in advance throughout the year. If you have amounts in this box, you must complete a tax return, regardless of your other wages or income, since the EIC advanced must be reconciled with the EIC that you actually receive credit for.

Box 10 -- Dependent Care Benefits: This box indicates the total DCBs provided by the employer under a dependent care assistance program. If you have an amount in this box, you must complete IRS Form 2441 (Child and Dependent Care Expenses) in order to reconcile this amount with amounts actually paid by you for dependent care coverage.

Box 11 -- Nonqualified Plans: This box shows the amount of distributions you received from any non-qualified deferred compensation plan or Section 457 plans (plans for non-government and tax-exempt organizations). If the distribution comes from a non-qualified plan, the amount is already included in your Box 1 compensation amount. But if the amount is from a Section 457 plan from a governmental agency, it is not included in Box 1 compensation. Instead, this amount must be reported to you using Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-sharing Plans, IRAs, Insurance Contracts, etc.). Additionally, employer contributions to deferred compensation plans are reported here when such amounts are for prior year services but included in Social Security and Medicare wages shown in Boxes 3 and 5.

Box 12 (a-d) -- Other Information: This box is for the employer to disclose certain employee information necessary for you to prepare your return. If you look on the back of your W-2 form, you will see a number of codes used to specifically identify the information. And, in many cases, if there are amounts in this box, it will require you to take additional action on your tax return.

As you are aware, you should have received your W-2 form by now. What to do if you haven't received it? Here are some tips:

  1. Contact the employer and request that the original form be issued or a duplicate be provided to you. It's possible that this employer has an incorrect address for you, and the original W-2 mailed to you was returned.

  2. If the employer refuses to correct the problem or, more likely, has gone out of business, contact the IRS to report the problem. The IRS will assist you in preparing IRS Form 4852 (Substitute Form W-2). Hopefully you've retained your final pay stub from the employer -- it'll be invaluable in preparing Form 4852. The IRS will then contact the employer about the problem.

  3. If you still don't have a W-2 form by the time the filing deadline (April 15) approaches, you can still file your return using the estimates provided on Form 4852. If you finally do receive a W-2 form from the employer at some later date, you'll be required to file an amended return in order to correct the estimates that you used on Form 4852 to the actual amounts reported to you on Form W-2.

Use this guide to understand your W-2 form and report the correct amounts in the correct boxes on your tax return.

Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.


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