In previous articles I have talked extensively about 1099’s and their purposes. However, the most important tax form is in my opinion, a W-2. Most people will receive this form for every foreseeable tax season until the end of time. The origins of the W-2 form was it was established by the Current Tax Payment Act of 1943. And the first W-2 forms was issued in 1944 to employees. This was done as an effort by the government to withhold income at the source. This in turn, smoothed out government revenue collecting, and cash flows and has led in part the current tax system we have today. History aside, what is a W-2? And is it taxable?
What is a W-2?
The official name of this form is “Form W-2 Wage and Tax Statement”. And quite frankly its’ purpose is in the name. This form’s purpose is to state how much income your employer paid you and how much taxes were withheld from your paycheck, both State and Federal. While receiving tax forms isn’t fun this form is quite useful. In my opinion the intuitiveness of this forms allows most people to prepare their own taxes. This allows people to do their taxes through Turbo Tax. Avoiding having to pay a CPA a large sum to prepare a “15-minute Tax Return”.
Key Boxes
Unlike most forms I would argue that every single box in this form is extremely important. However, boxes 1, 3 and 5 are the boxes where you employer will report income. Please note however that these numbers may be different based on what kind of pretax deductions you make. Also box 3 will only show wages up to the max Social Security wage limit, of which the contribution is based from. Boxes 2, 4 and 6 are how much was withheld by your employer for federal taxes. These taxes are the same as the income items, being Federal Income, Social Security and Medicare taxes.
Other boxes that are important are box 12 and its’ sub boxes which are the deductions that you tell your employer to take pretax. These can be for things like HSA account contributions or contributions to your 401K account. In addition, boxes 15 through 17 are important because this is where your employer reports your state information. The income derived from that state and the amount that was withheld from state taxes. Also, if you’re lucky enough to live in a city or locality that takes special taxes, anything withheld by your employer for those purposes will be reported on boxes 18 through 20.
Is It Taxable?
Well, it’s not so much that the W-2 is or isn’t taxable but rather what information is on it. If you get issued a W-2 the first thing to do is to make sure it is accurate. If you then agree that it is accurate, you’ll want to either send it to your accountant or keep it for your records. Reporting W-2 income is rather easy. You’ll report this income on box 1 of the 1040 and the taxes withheld on box 25a. Also be sure to report the state income and state/local taxes withheld on the proper state/local tax returns.
Conclusion
In summary the W-2 is one of the most important tax forms. It is an intuitive piece of paper that shows the recipient what they made in income for a given year and what was withheld from their paycheck. However even thought the form is quite simple it’s still incredibly important to make sure that all information is accurate on W-2 and to have it fixed ASAP if it is not. Also not mention to be sure to attach a copy of the W-2 to your income tax return when it is filed. If you have a CPA they should know to do this but if you file your own taxes be aware that anything with any tax withheld needs to be included with your taxes.