W-2 Income & Withholding

Form W-2, Wage and Tax Statement, is one of the most common documents you'll encounter as a tax professional. Understanding its boxes, how withholding works, and common issues will serve you well on the EA exam and in practice.

What Is Form W-2?

Form W-2 is the annual wage and tax statement that employers must provide to each employee. It reports:

• Total wages paid during the calendar year
• Federal, state, and local income taxes withheld
• Social Security and Medicare taxes withheld
• Other compensation details (retirement contributions, health coverage costs, etc.)

Who receives a W-2? Any employee who received wages, had income tax withheld, or would have had taxes withheld if claiming no more than one withholding allowance. This includes full-time, part-time, and seasonal employees.

Deadline: Employers must furnish Form W-2 to employees by January 31 following the tax year. For 2024 wages, the deadline is January 31, 2025. This same deadline applies to filing W-2s with the Social Security Administration.

Key W-2 Boxes Explained

Understanding each box on Form W-2 is critical for the EA exam:

Box 12 Codes: What They Mean

Box 12 uses letter codes to report various types of compensation. Here are the most common codes tested on the EA exam:

2024 Elective Deferral Limits:

• 401(k), 403(b), most 457(b) plans: $23,000 (under age 50)
• Catch-up contribution (age 50+): Additional $7,500
• SIMPLE IRA: $16,000 (catch-up: additional $3,500)

Why Box 1 Differs from Box 3 and Box 5

One of the most frequently tested W-2 concepts is why Box 1 (federal taxable wages) often differs from Box 3 (Social Security wages) and Box 5 (Medicare wages). Here's the breakdown:

Key insight: Pre-tax retirement contributions (401(k), 403(b)) reduce federal taxable wages but are still subject to Social Security and Medicare taxes. This explains why Box 3 and Box 5 are often higher than Box 1.

Example: Sarah earns $75,000 and contributes $10,000 to her 401(k). Her employer pays $6,000 toward her health insurance premiums through a Section 125 cafeteria plan.

• Box 1: $75,000 - $10,000 (401k) - $6,000 (health) = $59,000
• Box 3: $75,000 - $6,000 (health) = $69,000
• Box 5: $75,000 - $6,000 (health) = $69,000

Social Security and Medicare Tax Rates (2024)

The Federal Insurance Contributions Act (FICA) imposes taxes on both employers and employees:

*Additional Medicare Tax thresholds: $200,000 (single/HOH), $250,000 (MFJ), $125,000 (MFS)

Maximum 2024 withholding:

• Social Security: $168,600 x 6.2% = $10,453.20
• Medicare: No maximum (1.45% of all wages, plus 0.9% on wages over threshold)

Important: Employers begin withholding Additional Medicare Tax when wages exceed $200,000, regardless of the employee's filing status. The threshold adjustments for MFJ and MFS are reconciled when the employee files their tax return.

Form W-4 and Withholding

Form W-4, Employee's Withholding Certificate tells employers how much federal income tax to withhold. The form was redesigned in 2020 and no longer uses "allowances."

Key W-4 elements:

• Step 1: Filing status (Single, MFJ, HOH)
• Step 2: Multiple jobs adjustment
• Step 3: Claim dependents (reduces withholding)
• Step 4(a): Other income (increases withholding)
• Step 4(b): Deductions (decreases withholding)
• Step 4(c): Extra withholding per pay period

Withholding exemption: Employees may claim exemption from withholding if they (1) had no federal income tax liability in the prior year AND (2) expect no tax liability in the current year. They write "Exempt" in the space below Step 4(c). An exempt W-4 must be renewed each year by February 15.

Backup Withholding

Backup withholding is withholding at a flat 24% rate on certain payments when the payee fails to provide a correct taxpayer identification number (TIN) or is subject to backup withholding due to underreporting.

Backup withholding applies to:

• Interest and dividends
• Payment card and third-party network transactions
• Commissions, fees, and other payments reported on Form 1099

Backup withholding does NOT typically apply to W-2 wages (those have their own withholding system), but tax professionals should understand this concept.

Underwithholding Penalties and Safe Harbors

Taxpayers who don't have enough tax withheld throughout the year may owe an underpayment penalty (Form 2210). However, safe harbor rules provide protection:

Safe Harbor Options (2024):

Key points:

• W-2 withholding is treated as paid evenly throughout the year, even if actually withheld later
• Estimated tax payments are credited to the quarter in which they're paid
• The underpayment penalty is essentially interest, not a penalty (around 8% annually in 2024)

Common W-2 Issues

Missing W-2: If an employee doesn't receive their W-2 by mid-February:

1. Contact the employer directly
2. Call the IRS at 800-829-1040 if employer doesn't respond
3. File Form 4852, Substitute for Form W-2 with estimated figures from final pay stub
4. Amend return if correct W-2 arrives later with different amounts

Incorrect W-2: If a W-2 contains errors:

1. Request a corrected Form W-2c from the employer
2. If employer refuses to correct, file complaint with the IRS
3. May need to file Form 4852 if corrected W-2 not received in time

Multiple W-2s: Employees with multiple jobs receive a W-2 from each employer. When entering on Form 1040:

• Add all Box 1 amounts for Line 1
• Add all Box 2 amounts for Line 25
• Check if Box 3 wages from all employers exceed $168,600; claim excess Social Security withholding on Schedule 3

Excess Social Security Withholding: When an employee works for multiple employers and combined Box 3 wages exceed $168,600, they may have had too much Social Security tax withheld. The excess is claimed as a credit on Schedule 3, Line 11.

Example: Mike worked for two employers in 2024. Employer A paid $100,000, Employer B paid $90,000. Each employer withheld 6.2% on all wages:

• Employer A withheld: $100,000 x 6.2% = $6,200
• Employer B withheld: $90,000 x 6.2% = $5,580
• Total withheld: $11,780
• Maximum required: $168,600 x 6.2% = $10,453.20
• Excess to claim: $11,780 - $10,453.20 = $1,326.80

On the EA Exam

W-2 topics commonly tested include:

• Understanding why Box 1 differs from Box 3/5
• Calculating maximum Social Security withholding
• Recognizing Box 12 codes and their tax treatment
• Knowing the Additional Medicare Tax threshold ($200,000)
• Understanding Form 4852 as a W-2 substitute
• Calculating excess Social Security withholding with multiple employers

Exam Tip: Remember that pre-tax 401(k) contributions reduce Box 1 but NOT Box 3 and Box 5. Pre-tax health insurance (Section 125) reduces ALL three boxes.