Information for Navigating Complicated Discrepancies

You’ve completed distributing Types W-2. Simply if you assume you’re completed, an worker comes as much as you, arms you their type, and asks, Why are my W-2 Field 1 earnings lower than my Field 3 and Field 5 earnings?

Panicked, you look over the W-2. That doesn’t assist.

You do a fast search of Type W-2 on the net, however you’re too overwhelmed to get a fast, particular reply to your worker’s query.

Had been you improper? Do you must subject a corrected W-2? Most definitely, no. However, you must perceive why Type W-2 Field 1 values are greater or decrease than different values on the shape.

About Type W-2 Field 1

You probably know that it’s essential to report an worker’s wages and withheld taxes from the earlier 12 months on Type W-2. However, Type W-2 particulars stump many employers and staff.

Field 1

In case you imported info out of your payroll software program or used a tax preparer, you could not know the ins and outs of Field 1.

Nevertheless, understanding W-2 type fundamentals is essential to fielding worker questions. So, what’s Field 1?

Field 1—wages, suggestions, different compensation—comprises an worker’s complete wages topic to federal earnings tax. Don’t embody pre-tax advantages in Field 1.

Per the IRS, listing the next taxable wages, suggestions, and different compensation in Field 1:

  • Whole wages, bonuses, prizes, and awards you paid an worker
  • Noncash funds
  • Suggestions the worker reported
  • Sure worker enterprise expense reimbursements
  • Accident and medical health insurance premiums for two%-or-more shareholder-employees (when you’ve got an S Corp)
  • Taxable money advantages from a Part 125 cafeteria plan
  • Worker and employer contributions to an Archer MSA
  • Employer contributions for certified long-term care providers, if protection is supplied by an FSA
  • Taxable value of group-term life insurance coverage in extra of $50,000
  • Non-excludable instructional help funds
  • Quantity you paid for an worker’s share of Social Safety and Medicare taxes, if relevant
  • Designated Roth contributions
  • Distributions to an worker’s nonqualified deferred compensation plan or nongovernmental Part 457(b) plan
  • Qualifying Part 457(f) quantities
  • Funds to statutory staff who’re topic to Social Safety and Medicare taxes however not federal earnings tax withholding
  • Insurance coverage safety beneath a compensatory split-dollar life insurance coverage association
  • Worker and employer contributions to an HSA, if includible
  • NQDC plan quantities includible in earnings as a result of Part 409A
  • Nonqualified shifting bills and reimbursements
  • Funds made to former staff who’re on army obligation
  • All different compensation (e.g., scholarships and fellowship grants)

Field 2 reveals how a lot federal earnings tax you withheld from Field 1 wages all year long. The numbers in Field 1 and Field 2 assist decide an worker’s tax refund or legal responsibility.

Most advantages which might be exempt from federal earnings tax usually are not exempt from Social Safety tax. Field 3 studies how a lot cash an worker earned that was topic to Social Safety taxes through the 12 months.

As a result of some advantages usually are not topic to federal earnings tax, Containers 1 and three (in addition to Field 5) can have totally different values. Likewise, you might even see W-2 Field 1 and Field 16 differ. And, the values in Field 1 and Field 18 can also fluctuate.

Causes for W-2 type Field 1 wage variations

Listed here are just a few frequent causes for variations between Field 1 wages vs. Social Safety wages, Medicare wages, and state and native earnings wages:

1. The worker elected to contribute to a retirement plan

If an worker elected to contribute to a pre-tax retirement plan, their W-2 Field 1 wages are probably decrease than their Field 3 wages.

An worker’s elected retirement plan contributions usually are not topic to federal earnings taxes. Nevertheless, these contributions are topic to Social Safety and Medicare taxes.

Report the quantity of an worker’s retirement plan contributions on Type W-2. Use code “D” in Field 12 and test the field beneath “Retirement plan” in Field 13.

Do you contribute to an worker’s retirement plan? In that case, don’t embody your contributions on the worker’s Type W-2.

An worker’s elected contributions to a Roth retirement account are topic to federal earnings tax, Social Safety, and Medicare taxes.

Let’s say an worker incomes $50,000 contributed $2,000 to their 401(ok) through the 12 months. The worker’s taxable wages in Field 1 are $48,000. The worker’s taxable wages in Containers 3 and 5 are $50,000.

Retirement plan contributions could be topic to state earnings tax, relying on the state. Some states comply with federal guidelines in terms of tax-exempt retirement contributions. Different states tax contributions on the state stage.

If retirement contributions are exempt from state earnings tax, Containers 1 and 16 often is the identical. If contributions are topic to state earnings tax, Field 16 could also be greater than Field 1.

For instance, Pennsylvania requires staff to pay state earnings tax on retirement contributions. Then again, Ohio aligns itself with federal necessities and exempts retirement contributions from state earnings tax. Verify along with your state for extra info.

2. The worker participated in your adoption help program

If in case you have an adoption expense program at your small enterprise, you pay or reimburse staff for qualifying bills. Some adoption-related bills embody adoption charges, court docket prices and legal professional charges, and journey bills.

Whenever you pay or reimburse an worker for qualifying adoption bills, the worker’s W-2 Field 1 is probably going greater than Field 3.

Adoption expense funds and reimbursements are exempt from federal earnings tax withholding however are topic to Social Safety and Medicare taxes.

Report the quantity of adoption help bills on Type W-2 in Field 12. Use code “T” for adoption expense funds or reimbursements.

For instance, you present a reimbursement of $1,100 to cowl an worker’s adoption bills. The worker’s gross earnings is $65,000. Document $63,900 in Field 1 and $65,000 in Containers 3 and 5.

3. The worker earned above the SS wage base

In some situations, Field 1 could be greater than Field 3. After an worker earns above the Social Safety wage base, they now not must pay Social Safety tax.

As a result of earnings above the Social Safety wage base aren’t topic to SS tax, don’t report them in Field 3.

The 2023 Social Safety wage base is $160,200.

Wages above the SS wage base are topic to federal earnings tax. Consequently, proceed itemizing the wages in Field 1.

Let’s say you pay an worker $170,000 in taxable wages in 2023. You’ll enter “$170,000” in Field 1 and “$160,200” in Field 3. As a result of there is no such thing as a Medicare wage base, it’s essential to additionally report “$170,000” in Field 5.

Heads up! The 2024 Social Safety wage base is rising to $168,600 in 2024.

Instance Type W-2 Field 1 “discrepancy”

Check out this instance Type W-2.

IRS Form W-2 example showing box 1 amount lower than boxes 3 and 5

The worth in Field 1 is decrease than the values in Containers 3 and 5. You can too see that there’s a checkmark in Field 13.

This instance Type W-2 reveals that the worker contributed to a pre-tax retirement plan, lowering their taxable wages. Nevertheless, the retirement contribution continues to be topic to Social Safety and Medicare taxes.

Searching for a dependable supplier to file Types W-2 for you? Patriot Software program’s Full Service payroll providers will file Types W-2 in your behalf. All you must do is print out the worker copies for distribution. Get your free trial now!

This isn’t meant as authorized recommendation; for extra info, please click on right here.

This text has been up to date from its unique publication date of March 4, 2019.


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