November, 2019

Why Are W-2s and Final Pay Stubs Different?

Payroll and Tax Compliance | Year-End Processing

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Why Are W-2s and Final Pay Stubs Different?

Why is the gross amount on my final pay stub different than the amount on my w-2?

APS receives many questions during tax season and this one comes up quite often. It is very common for gross taxable wages on an employee’s final pay stub of the year to differ from the amount shown on their W-2. This can typically be attributed to the following three reasons:

1. Earnings Included Non-Taxable Income Items

Non-taxable income items would include reimbursements for mileage or another type of non-taxable expense you incurred that was paid back to you in a payroll run. As a result, the gross wages on an employee’s pay stub will often differ from the Boxes 1, 3, 5, and 16 wages on the W-2, because these non-taxable items will lower gross taxable wages.

Example

Mary’s gross wages are $30,000 but over the course of the year, she received $2,000 towards a non-taxed car allowance. Mary’s taxable W-2 wages will be $28,000. ($30,000 – $2000 = $28,000).

2. Company-Sponsored Retirement Plan Participation

These types of plans, such as a 401(k), will reduce the taxable federal and state wages only, which are reported in Boxes 1 and 16, respectively.

Example

Sally’s gross wages are $30,000 but over the course of the year, she contributed $3,000 towards her 401(k) retirement. Sally’s federal and state W-2 wages will be $27,000. ($30,000 – $3000 = $27,000).

3. Company Health Insurance is a Pre-Tax Deduction

This is the most common reason for your pay stub earnings to be different from your W-2. If your company offers pre-tax health insurance and you have participated, then the taxable wages in Boxes 1,3, 5, and 16 will be lower by the amount of the pre-tax health insurance deduction.

Example

John’s gross wages are $30,000 but over the course of the year, he contributed $2,000 to a pre-tax health insurance deduction. John’s taxable W-2 wages will be $28,000 ($30,000 – $2,000 = $28,000).

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What do all the boxes on my W-2 mean?

Now that you have a better understanding of why your final pay stub is different from your W-2, let’s break down what all of those different boxes mean on a Form W-2.

Box 1: Wages, Tips, and Other Compensation - The gross taxable wage amount your employer paid you. This includes Tips, Bonuses, Commissions, Wages, and Salaries.

Box 2 - Federal Income Tax Withheld - The amount of federal income tax withheld from your wages reported in Box 1. Your W-4 was used to determine the tax withholding rate.

Box 3: Social Security Wages - The amount of earnings your employers paid, not including tips, that is subject to Social Security tax.

Box 4 - Social Security Tax Withheld - This amount represents 6.2 percent of the Social Security wages in Box 3 withheld during the year.

Box 5: Medicare Wages and Tips - The total amount of earnings your employer paid you subject to Medicare tax.

Box 6 - Medicare Tax Withheld - This represents 1.45 percent of the total Medicare wages in Box 5 during the year. Employees who earn more than $200,000 (single) or $250,000 (married filing jointly) are also subject to an additional 0.9 percent Medicare tax.

Box 7: Social Security Tips - The amount of tips earned that is subject to Social Security Tax. The amount in Box 3 and Box 7 should total the amount in Box 1.

Box 8 - Allocated Tips - This box shows tip income allocated to you by your employers. This amount isn’t included in W-2 boxes 1, 3, 5, or 7.

Box 10 - Dependent Care Benefits - The total amount paid into your dependent care flexible spending account for the year. Any amount over $5,000 is also included in Box 1.

Box 11 - Nonqualified Plans - This box shows the total amount distributed to you from your employer’s nonqualified deferred compensation plan.

Box 12 - Compensation and Benefits: This box is used to indicate a compensation or benefit by code. Click to see the types of codes included.

A — Uncollected Social Security or RRTA tax on tips. Include this tax on Form 1040.
B — Uncollected Medicare tax on tips. Include this tax on Form 1040.
C — Taxable cost of group-term life insurance over $50,000 (included in boxes 1,3 (up to Social Security wages base), and box 5.
D — Elective deferrals to a section 401(k) cash or deferred arrangement. It also includes deferrals under a SIMPLE retirement account that’s part of a section 401(k) arrangement.
E — Elective deferrals under a section 403(b) salary reduction agreement.
F — Elective deferrals under a section 408(k)(6) salary reduction SEP.
G — Elective deferrals and employer contributions (including non-elective deferrals) to a section 457(b) deferred compensation plan.
H — Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan.
J — Nontaxable sick pay (information only, not included in Boxes 1, 3, or 5).
K — 20% excise tax on excess golden parachute payments.
L — Substantiated employee business expense reimbursements (nontaxable).
M — Uncollected Social Security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only).
N — Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only).
P — Excludable moving expense reimbursements paid directly to a member of the U.S. Armed Forces (not included in Boxes 1, 3, or 5).
Q — Nontaxable combat pay. See the instructions for Form 1040 or Form 1040A for details on reporting this amount.
R — Employer contributions to your Archer medical savings accounts (MSA). Report on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.
S — Employee salary reduction contributions under a section 408(p) SIMPLE plan (not included in Box 1).
T — Adoption benefits (not included in Box 1). Complete Form 8839, Qualified Adoption Expenses, to compute any taxable and nontaxable amounts.
V — Income from exercise of non-statutory stock option(s) (included in Boxes 1, 3 (up to Social Security wage base), and 5). See Publication 525, Taxable and Nontaxable Income, for reporting requirements.
W — Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria plan) to your health savings account (HSA). Report on Form 8889, Health Savings Accounts (HSAs).
Y — Deferrals under a section 409A nonqualified deferred compensation plan.
Z — Income under a nonqualified deferred compensation plan that fails to satisfy section 409A. This amount is also included in Box 1 and is subject to an additional 20% tax plus interest. See the Form 1040 instructions.
AA — Designated Roth contributions under a section 401(k) plan.
BB — Designated Roth contributions under a section 403(b) plan.
DD — Cost of employer-sponsored health coverage. The amount reported with Code DD isn’t taxable.
EE — Designated Roth contributions under a governmental Section 457(b) plan. This amount doesn’t apply to contributions under a tax-exempt organization Section 457(b) plan.
FF — Permitted benefits under a qualified small employer health reimbursement arrangement.
GG — Income from qualified equity grants under section 83(i).
HH — Aggregate deferrals under section 83(i) elections as of the close of the calendar year.