Learn about things that affect the amounts in Boxes 1, 3 and 5 on your employees’ W-2s.
You may see boxes 1, 3 and 5 have different amounts in each, or are different compared to your employees' pay stubs and wonder if this is wrong. In some cases the different amounts are correct.
Let’s look at some common payroll situations and examples that can affect these boxes. These could also impact state tax amounts on the W-2.
- Your employee has a pre-tax deduction, fringe benefit, or company contribution
- Your employee earns tips
- Your employee is exempt from one or more federal taxes
Your employee has a pre-tax deduction, fringe benefit, or company contribution
Does your employee have any of the following?
- Retirement deduction like a 401(k) or IRA
- Pre-tax insurance (Cafeteria 125) plans
- Group Term Life Insurance (GTLI)
- A taxable fringe benefit like Personal Use of Company Car (PUCC)
- A taxable company contribution like a Health Savings Account (HSA)
Retirement deductions
Deductions like retirement can decrease the amounts in one or more of the boxes because they may be not subject to Federal Withholding, Social Security, or Medicare.
Example of how this might impact the W-2 amounts
Let’s look at an example of an employee who has a 401(k) deduction. An employee made $75,000 and contributed $10,000 to a 401(k) this year.
401(k) is not subject to Federal Income Tax, so it’s not included in Box 1 wages. It is subject to Social Security and Medicare taxes, so it’s included in Boxes 3 and 5.
- Box 1 - Wages, tips, and other compensation (for Federal Income Tax): 65,000.00 (75,000 - 10,000)
- Box 3 - Social security wages: 75,000.00
- Box 5 - Medicare wages and tips: 75,000.00
Pre-tax insurance (125 Plans)
Pre-tax insurance plans decrease the amounts in Boxes 1, 3, and 5 because they aren't subject to Federal Withholding, Social Security, or Medicare. Pre-tax insurance plans don't report in Boxes 12 or 14 on the W-2.
Example of how this might impact the W-2 amounts
Let’s look at an example of an employee who has a 125 health insurance plan. The employee made $75,000 and contributed $5000 to their health insurance this year.
- Box 1 - Wages, tips, and other compensation (for Federal Income Tax): 70,000 (75,000 - 5,000)
- Box 3 - Social security wages: 70,000.00
- Box 5 - Medicare wages and tips: 70,000.00
GTLI, fringe benefits and company contributions
Fringe benefits and company contributions that are subject to one or more Federal taxes can increase the amounts in one or more of the boxes. The employee didn’t receive the extra money on their paycheck, but the value of the fringe benefit or company contribution is included in the W-2 amounts for the appropriate tax calculations.
Example of how this might impact the W-2 amounts
Let’s look at an example of an employee who used the company car for personal reasons. This is a taxable fringe benefit known as Personal Use of Company Car (PUCC).
The employee made $75,000 and the value of PUCC is $5000 for the year.
PUCC is subject to Social Security, and Medicare. You can choose to exclude it from Federal Income Tax.
- Box 1 - Wages, tips, and other compensation (for Federal Income Tax): 75,000.00
- Box 3 - Social security wages: 80,000.00
- Box 5 - Medicare wages and tips: 80,000.00
Your employee earns tips
An employee who earns tips may also have different amounts in Boxes 1, 3, and 5. This is because tips are included in the amounts in boxes 1 and 5. They are separated out in box 3 and box 7 for Social Security.
Example of how this might impact the W-2 amounts
Let’s look at an example of an employee who earns tips. The employee made $40,000 in regular pay and $10,000 in tips this year.
- Box 1 - Wages, tips, and other compensation (for Federal Income Tax): 50,000.00
- Box 3 - Social Security wages: 40,000.00
- Box 5 - Medicare wages and tips: 50,000.00
- Box 7 - Social Security tips: 10,000.00
Your employee is exempt from one or more Federal taxes
There are several types of employees who are not subject to some Federal taxes per IRS rules. Clergy, employees on a work Visa, and some family members of business owners are a few examples.
Example of how this might impact the W-2 amounts
Let’s look at an example of a Visa employee who is exempt from Social Security and Medicare, but is subject to Federal Income Tax. The employee made $50,000 this year.
- Box 1 - Wages, tips, and other compensation (for Federal Income Tax): 50,000.00
- Box 3 - Social security wages: 0.00
- Box 5 - Medicare wages and tips: 0.00
Note: This is different from an employee claiming exempt on their W-4 for Federal Income Tax. This employee is still subject to Federal Income Tax and their pay is included in Box 1 on the W-2.
I’m sure an amount is wrong on my employee’s W-2. How do I fix it?
Learn how to fix an incorrect W-2.