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Deciphering Your W-2: A Guide for Small Business Owners and Their Employees

Introduction: Understanding and reviewing Form W-2 is important for both small business owners and employees, as it directly impacts tax return filings and future social security benefits. This guide will help you understand the W-2 by describing the sections that commonly impact our client base.

What is Form W-2? The W-2 is a document issued by employers to employees and the IRS. It details the employee’s annual wages and the taxes withheld from their paycheck.

  • Box a (Social Security Number): Ensuring the accuracy of the Social Security Number (SSN) listed in Box a on your W-2 form is essential. An incorrect SSN can lead to your tax return being rejected by the IRS, delaying refunds, and potentially causing eligibility issues for certain tax credits. Additionally, accurate reporting of your SSN ensures that your earnings are correctly credited to your Social Security and Medicare accounts, impacting your benefits in retirement. Always double-check your SSN on your W-2 to avoid these issues.
  • Boxes 1 and 2: These boxes are key for understanding your tax obligations. Box 1 shows the amount of your earnings that are subject to federal income tax, while Box 2 displays the amount of federal withholding paid throughout the year. These figures are crucial for determining if you will receive a refund or owe additional taxes.
  • Boxes 3 and 4: Calculate your contributions to Social Security, which are a significant hidden employee expense. These contributions provide you with retirement, disability, and survivor benefits.
  • Boxes 5 and 6: Indicate Medicare wages and taxes, ensuring you are contributing to your healthcare benefits for retirement.
  • Boxes 16 and 17: These boxes are important for understanding your state tax obligations. Box 16 shows the amount of your earnings that are subject to state income tax, as listed in Box 15, while Box 17 displays the amount of taxes already paid to that state throughout the year. These figures are used to determine if you will receive a refund or owe additional taxes to that state.

Common Box 12 Codes:

  • Code DD: Reports the cost of employer-sponsored health coverage. This amount is not taxable but provides useful information on the cost of your health care benefits and should be considered when calculating total compensation by an employee.
  • Code S: Represents employee salary reduction contributions under a SIMPLE IRA plan.
  • Code D: Signifies elective deferrals to a 401(k) plan. This is the portion of your salary you choose to defer to your 401(k).
  • Code W: This includes Health Saving Account account contributions.
  • Code AA: Designates Roth contributions under a 401(k) plan. Unlike traditional 401(k) contributions (Code D), Roth 401(k) contributions are made with after-tax dollars.

Box 13 – Retirement Plan Checkbox: If Box 13 on the W-2 is checked, it indicates that the employee is covered by a retirement plan at work. This can impact your ability to deduct contributions to a traditional IRA on your personal tax return, depending on your income level.

Box 14 – SE Health:

  • SE Health: This is used to report the premiums paid for health insurance by a S-Corp shareholder, which can be deductible. This information is critical for S-Corporation owners who may deduct health insurance premiums on their personal tax returns. For more information check out article about eligibility and deductibility.

Conclusion: Whether you’re a small business owner or an employee, understanding your W-2 form is key to accurately filing your taxes and planning for the year ahead. For more guidance on navigating your tax needs and payroll compliance, check out our services at Stegner CPA.

Disclaimer: The tax information provided here is for informational purposes only and should not be construed as or relied upon for tax or legal advice. This information is based on the laws and regulations in effect at the time of issuance, and we do not undertake any obligation to update this information after the date of its release. Please speak with your tax professional or attorney for guidance specific to your circumstances.

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