Understand your W-2 this tax season: The Tax Cuts and Jobs Act has changed this longtime form
January 21, 2019 | Corey Butler
Let’s get this out of the way: Taxes are complicated.
Just as you might get used to one set of rules or processes, even the smallest of changes can affect how you proceed in the coming year — that is, of course, if you planned at all.
With the Tax Cuts and Jobs Act of 2017 (TCJA), the current filing year is a challenge for taxpayers and certified public accountants alike. There are many new changes. Chief among them? What must be included as taxable income on the W-2 Form, which is a year-end tax statement from your employer stating where your income and related taxes were allocated throughout the year.
So, where to start?
It’s imperative to review your W-2 for accuracy because it impacts your annual taxes and potentially your future Social Security earnings. For many, this is where your tax-filing season begins.
What to check on your W-2
Verify that your name, address and Social Security number are correct.
This will affect your tax history and, subsequently, Social Security payments upon retirement. Talk to your employer if any of this information is incorrect.
Review the income numbers on the form.
You will notice that there are three income amounts reported:
The amount that is reported in this box is the amount that is reported as your W-2 income on your Form 1040, which tells the IRS about your taxes. Box 1 is your income including fringe benefits, such as group term life insurance, parking, etc. Box 1 does not include any pretax benefits, such as employer-sponsored retirement plan contributions (such as 401(k) or 403(b) plans), flexible spending account contributions you made, dependent care flexible spending account contributions, and health insurance premiums.
Unlike Box 1, the next income boxes include all your pretax benefits. Here is what to expect in these boxes:
This is your Social Security earnings, less pretax deductions permitted as opposed to the items in Box 1. Social Security wages are usually higher than your taxable wages. The Social Security wages include pretax benefits such as your 401(k) deferrals.
For most taxpayers, the difference between Box 1 and Box 3 is your retirement plan contributions paid into your employer’s plan (Box 12, Code D). However, to further complicate matters, this income is capped at $128,400 as of 2018, so the figure shown in Box 3 should be no more than $128,400. The related tax is 6.2 percent, meaning the amount in Box 4 should be no more than $7,960.80. (This is a tax that your employer has been paying for you throughout the year with each paycheck.)
This is your Medicare earnings. It is calculated the same as Social Security items, except it does not have a cap on income; it is a flat tax of 1.45 percent. Accordingly, Box 5 multiplied by 1.45 percent gives you the amount reported in Box 6. However, if you earn more than $200,000, there is an extra .90-percent tax withheld. This is a tax that your employer has been paying for you throughout the year with each paycheck.
This is your state income, which is typically the same as the amount in Box 1. These amounts can be different if you had newly taxed fringe benefits in 2018, like parking, bicycle benefits and certain employee prizes, that may not be taxed in Minnesota, or if you worked in more than one state during the year.
Confirm your eligibility to participate (or not) in your employer’s retirement plan.
- If you can participate, verify the amount reported on Box 12, Code D by comparing it to the amounts you withheld from your checks for your retirement plan and the amounts noted as participant contributions on your retirement plan statement.
- If you are not eligible to participate in a retirement plan, make sure that Box 13 for retirement plan is not marked. If this box is marked, it will impact your ability to make certain IRA contributions for the tax year.
Review your last paycheck stub for the year from your employer.
- The amount noted as federal withholding on your pay stub should be the same as your W-2's Box 2.
- The amount noted as state withholding on your pay stub should equal the amount in your W-2's Box 17. If you worked in more than one state, each state should be listed with related income and tax withheld.
Isn't a W-4 a thing, too?
A Form W-4 is the document you give your employer to determine the amount of tax to withhold on your behalf and send to the government. Tax planning aids in figuring out the best withholding number for your situation because it’s based on a variety of factors, including your income level, frequency of payments and the number of exemptions noted (based on filing status).
The withholding tables changed in 2018, meaning you may experience an unexpected outcome on your tax return this year if you didn’t check your withholding. In fact, you should periodically review this form and update it as your financial situation changes. The IRS has a withholding calculator available online that walks you through a series of questions to assist you in deciding the number of allowances you should claim so you have the proper amount of taxes withheld.
Check in with a certified public accountant
CPAs are a great resource. They can help you plan throughout the year so there are few surprises when it comes to filing a return, especially as it relates to properly withholding the federal income tax on your paycheck, reviewing your W-2 and helping you file your tax return.
Don't have a CPA? Visit CPAmeASAP.com or call 800-331-4288 to connect with a CPA today.
Thank you to Kyla Hansen, CPA, a partner with John A. Knutson & Company PLLP for her contributions to this blog.
Topics: Taxation-Individual, Personal Financial Planning
Corey Butler is the MNCPA communications coordinator, focusing on providing timely and relevant content for members in both print and digital mediums. He's also the person behind the wildly successful Taxline, which is 25 years strong. Corey keeps busy outside of the MNCPA spending time with his wife and children, embracing and volunteering in his community, and catching up on long-lost hobbies. He also mows his yard. Corey enjoys the works of John Steinbeck and J.K. Rowling, and Paul Bunyan and Robin Hood lore. You may reach him at 952-885-5533 or firstname.lastname@example.org.
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