The Difference Between a W-2 and Final Pay Stub
As fall ends and winter begins, employers begin preparing for the upcoming tax season. One question that many employers and HR directors get asked each year revolves around the W-2 vs last pay stub. When employees receive their W-2s each year, they notice a difference between their last pay stub and W-2 form.
Regardless of whether you’re new to payroll taxes or you’re a seasoned payroll veteran, this topic can be confusing to navigate. We’ve created this article so you can understand and explain the differences in gross pay vs W-2 wages to your employees.
Why is My W-2 Different from My Salary?
The compensation may be different on a W-2 vs a final pay stub, but there’s a good reason. Your salary is a gross dollar amount earned before taxes and deductions are taken out. Meanwhile, your Form W-2 shows your taxable wages reported after pre-tax deductions. Pre-tax deductions include employer-provided health insurance, dental insurance, life insurance, disability insurance, and 401k contributions. That’s why your W-2 doesn’t match your last pay stub.
Unless you opt out of pre-tax deductions, your salary amount will almost always be higher than wages reported on your W-2. To clarify which pre-tax deductions you are opted in to, check Box 1 of your W-2. If you are confused about your Box 1 deductions, speak to your HR manager, as they can help clarify details related to these withholdings.
Is a W-2 the Same as a Pay Stub?
No, a W-2 is not the same as a pay stub. A W-2 form, also known as a Wage and Tax Statement, is a required document that an employer must send to employees each year. Once an employee elects their preferred withholdings like healthcare and 401(k) contributions, the employer must send a receipt of that information to the Internal Revenue Service (IRS) for reporting purposes. Think of your W-2 as net earnings pay stub.
A pay stub outlines the details of an employee’s gross wages each pay period. While it is not required for employers to send pay stubs to employees, the Fair Labor Standards Act does make employers track hours employees have worked. A paystub is typically attached to an employee’s physical paycheck. Certain payroll providers also offer paperless payroll so employees can also access paystubs online.
Reasons Why the Gross Amount on Your End-of-Year Pay STub May Be Different Than the Amount on Your W-2
APS receives many questions during tax season, and the one that comes up most often is, “Why doesn’t my W-2 match my pay stub?” or “Why doesn’t my W-2 match my salary?” It is typical for gross taxable wages on an employee’s final pay stub of the year to differ from the amount shown on their Form W-2. This difference is a result of the following reasons:
1. Year-End Pay Stubs Include Non-Taxable Income Items
Examples of non-taxable income items include reimbursements for mileage or other types of non-taxable expenses. These non-taxable items are paid back during payroll runs. As a result, the gross wages on an employee’s pay stub 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.
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
Company-sponsored retirement plans like a 401(k)s reduce taxable federal and state wages only. They are reported in Boxes 1 and 16, respectively. If you contribute to a retirement plan, the compensation on your end-of-year pay stub vs your W-2 will be different.
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
Company health insurance is the most common reason that your last pay stub does not match 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 than the amount of the pre-tax health insurance deduction. Pre-tax deductions will lower the gross wages by the annual amount of the deduction.
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).
Do Your Employees Have W-2 Questions?
Give them our handy W-2 vs Last Pay Stub handout.
What do all the boxes on my W-2 mean?
Now that you have a better understanding of the W-2 vs last pay stub, we’ll discuss what all of those boxes mean.
Box 1: Wages, Tips, and Other Compensation
The amount of gross taxable wage your employer paid you. This includes tips, bonuses, commissions, wages, and salaries.
Box 2: Federal Income Tax Withheld
Federal income tax withheld is the amount of money withheld from your wages reported in Box 1. Your W-4 determined this tax withholding rate.
Box 3: Social Security Wages
The amount of earnings your employer paid you - not including tips - 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
Medicare wages and tips are the total amount of earnings your employer paid you subject to Medicare tax.
Box 6: Medicare Tax Withheld
Medicare tax withheld 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 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 11: Nonqualified Plans
This box shows the total amount distributed to you from your employer’s nonqualified deferred compensation plan.
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 10: Dependent Care Benefits
The total amount paid into your dependent care flexible spending account for the year. Any amount over $5,000 is included in Box 1 as well.
Box 12: Compensation and Benefits (Click to see the codes included)
This box is used to indicate a compensation or benefit by code. These codes include:
- 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.
Box 13: Retirement Plan
This box is checked when an employee is an active retirement plan participant.
Box 14: Other
This box can be used to report miscellaneous information, such as:
- State disability insurance taxes withheld
- Union dues
- Uniform payments
- Health insurance premiums deducted
- Nontaxable income
- Educational assistance payments
- A member of the clergy’s parsonage allowance and utilities
- Charitable contributions made through payroll deduction
Box 16: State Wages, Tips, Etc.
The amount of your wages subject to state tax. This amount might differ from the amount shown in Box 1.
APS helps organizations of all sizes and industries with their payroll processing and tax compliance needs. Our unified payroll platform and tax compliance experts will help alleviate the burden of payroll tax compliance once and for all. To learn how APS can help make your payroll processing and tax compliance easier, give us a call at 855.945.7921.
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