W-2 Vs. Final Pay Stub: Understanding
APS receives many questions during tax season, and one that seems to come up quite often is why an employee’s wage amounts on a final pay stub of the year are different than what is shown on the form W-2. To make things easier during this time of year, we’ve outlined the differences so you can share this information with your employees.
Deciphering Your 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 3: Social Security Wages - The amount of earnings your employers paid, not including tips, that is subject to Social Security tax.
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Box 5: Medicare Wages and Tips - The total amount of earnings your employer paid you subject to 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 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.
W-2 vs. Final Pay Stub
Understanding the difference between the last pay stub and W-2 can be confusing if you are not familiar with payroll and taxes. Employees often receive their W-2s and notice there is a difference between the earnings on the last paycheck stub and the reported earnings on their W-2s. Typically this can be attributed to one of three different scenarios:
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.
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.
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.
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).
Keep In Mind
The most important thing to remember is an employee’s gross wages may differ from their taxable wages, depending on the situation. Download the quick reference sheet to give to your employees who have any questions.
How APS Can Help
APS helps organizations of all sizes and industries with their payroll processing and tax compliance needs. With a unified platform and a team of tax compliance experts in your corner, we can help make payroll and tax errors a thing of the past.
Looking to make a mid-year switch to a new payroll provider? It’s easier than you think and APS can help you along every step of the way to ensure a successful transition. For the past four years, we have ranked as a High Performer, Best Customer Support, Ease of Use, Functionality, and Product Quality by G2 Crowd. We have also been ranked the #1 software company in Louisiana, a testament to the confidence our clients have in our work.
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