How to Read Your Form W-2 And What If Your Organization Uses a PEO
Learning how to read a form W2 takes a little time, but understanding your tax documents helps you prepare to file taxes.
Especially if your employer outsources HR work like W2 preparation, you need to understand how to read a form W2.
Keep reading to learn about how to read a W2 and what to do if your organization uses a PEO.
What is a PEO?
Small to medium-sized businesses that are rapidly scaling can have difficulties managing human resource needs. They just may not have the manpower to manage the necessary employees they need for their company to grow.
These businesses may outsource some of their HR tasks to a PEO. A PEO is a professional employment organization that focuses on managing employees.
When a company uses a PEO, they trust their finances to the professionals that know how to make their companies better. They end up streamlining the HR process, something that ultimately affects a business's bottom line.
How Does a PEO Affect Filing Taxes?
Among other HR duties, the PEO will manage payroll and taxes. So, how does this impact you as an employee?
As far as taxes and the W2 goes, if your organization uses a PEO, the PEO will file form W2 instead of your company. There is no special PEO form but rather just a regular form W2 that the PEO prepares.
The PEO has the responsibility of filing taxes as well as paying employees. So when an employer typically reports wage and salary information on a Form W2, the PEO will do it for a company that is co-employing with them.
A W2 reports the amount of federal, state, and other taxes withheld from your paycheck.
As you begin to prepare your tax return, you need your W2. The IRS requires companies, even those with PEOs, to send you a W2 no later than January 31 of the end of the tax year.
How to Read a Form W2
Regardless of who files your W-2, you still need to understand how to read a form W2. The form has 20 parts or boxes total. Here is how you can read your W2 box by box.
Box 1: Wages, Tips, and Other Compensation
This box will report what a company pays you. It includes all of your wages that are subject to federal income tax.
Box 2: Federal Income Tax Withheld
This box is for federal income tax that a company withholds from your wages and then sends it to the IRS. The number in this box depends on your taxable wages, your filing status, and your withholding allowances.
This box helps you determine why you receive the refund you receive or why you owe the amount of tax that you owe. The IRS will compare what you paid in federal income tax with your total liability.
Box 3: Social Security Wages
The number is box 3 is your total wages subject to Social Security tax. This number will not include the amount of pre-tax deductions exempt from Social Security tax.
Your Social Security wage base should be less than this number. In 2020, the SS wage base is $137,700.
Box 7 has Social Security tips. So the number in Box 7 and the number of Box 3 combined should not exceed $137,700 for 2020.
Box 4: Social Security Tax Withheld
Box 4 says how much an employer withheld from your Social Security wages and tips.
The employee part of the Social Security tax is 6.2 percent of your wages, not exceeding the SS wage base. Since 6.2 percent of $137,700 is $8,537.40, Box 4 should not have a number higher than $8,537.40 for 2020.
Box 5: Medicare Wages and Tips
Box 5 reveals how much you earned in Medicare wages and tips.
Unlike Social Security, there is no Medicare wage base. So even if the employee earned above the Social Security wage base, the number in Box 5 will be higher than Box 3.
Box 6: Medicare Tax Withheld
Box 6 shows how much your employer withheld from your wages for Medicare tax. This should be 1.45 percent of your wages.
If you take the amount in Box 5 and multiply it by the Medicare tax rate, you should get the same number that you see in Box 6. However, if you earned above $200,000, you have a greater tax liability.
If you earned more than $200,000 as a single person, your employer should have withheld an additional Medicare tax rate of 0.9 percent from your wages above $200,000.
Box 7: Social Security Tips
This box shows the amount of money you earned in tips if you have a job where you earn tips and report them. Your employer will also include tip amounts in Boxes 1 and 5.
Remember, the total of Boxes 7 and 3 should not exceed $137,700 for 2020.
Box 8: Allocated Tips
If your employer has allocated any tips to you, he or she should put that amount in Box 8. Tips qualify as allocated tips when an employer designates those to tipped employees.
Boxes 1, 3, 5, and 7 should not include any of the tips included in Box 8. You will have to use Form 4137 to calculate the taxes on your allocated tips.
Box 9: Verification Code
Box 9 used to have a spot for a verification code. However, because of the early filing requirements, this code is now defunct, and you will find the box left blank.
The IRS's website has all of the information on the initiative that requires the verification code.
Box 10: Dependent Care Benefits
If you received any dependent care benefits because of the dependent care assistance program, your employer will include the benefit amount in Box 10.
If you receive a dependent care benefit under $5,000, you can celebrate a little because that benefit is not taxable. Only benefits over $5,000 are taxable.
If you received more than $5,000, your employer will report the excess in Boxes 1, 3, and 5.
Box 11: Nonqualified Plans
If your employer has a nonqualified deferred compensation plan, he or she will put that amount in Box 11.
So if you received any bonuses during the year that did not count toward your taxable income, you will see those accounted for in Box 11.
You will see these distributions amounts included in Box 1 as well.
Box 12: Codes
Box 12 contains codes specific to the W2. These codes could lower your taxable wages.
For example, if you elected to contribute $500 to a retirement plan, then you'll see D | 500 in this box. Your employer or PEO will understand these codes and can explain them as well.
Box 13: Checkboxes
Box 13 will no thave numbers but rather boxes to check. Your employer will check the boxes that apply to you from statutory employee to retirement plan to a third-party sick day.
Box 13 works with box 12. So if the number in Box 13 refers to your retirement plan, your employer will mark box 13.
Box 14: Other
Box 14 is the catch-all box where your employer will report anything he or she did not report elsewhere. So he may put in vehicle lease payments or state disability insurance taxes that he withheld, or even health insurance premiums he deducted.
Box 15: State | Employer’s State ID number
Box 15 recognizes your employer's employer ID number. You should see the two-letter abbreviation for your employer's state and then the state EIN.
If your state does not require reporting, your employer will leave Box 15 blank.
Box 16: State Wages, Tips, and Like Income
Wages subject to the state income tax will show up in Box 16. If you're one of the lucky ones who live in one of the nine states with no income tax, your employer will leave Box 16 blank.
Box 1 and Box 16 may not match up. Federal income tax will exempt some income that states will tax.
Box 17: State Income Tax
Box 17 reports how much your employer withheld for state income tax. If your employer did not withhold any of your income for state income tax, this box will be blank.
Box 18: Local Wages, Tips, and Like Income
If you have a local income tax, then your employer will put your total taxable wages and tips in box 18. If your locale has no local income tax, then this box will be blank.
Box 19: Local Income Tax
Box 19 will have the actual local income tax that your employer withheld. Again, if you live in a place with no local income tax, this box will be blank.
Box 20: Locality Name
Box 20 just says where your business is located. It will contain either a city or locality name.
By law, you should receive your completed Form W2 no later than January 31. The IRS requires this of your employer, regardless of if they're using a PEO or not.
Employers also have to file a Form W2 with the Social Security Administration by that time.
This deadline reflects the 2015 legislation that is supposed to combat identity theft and refund fraud.
You, as an employee and tax filer, need time to figure out your taxes and make sure you have enough to pay what you owe the IRS. The IRS understands this, and that is why they require your employer to have your Form W2 to you by the end of January. This gives you two and a half months to figure and file your taxes.
Understand Your Documents
Now that you understand how to read a form w2, you can move forward with filing your taxes with confidence.
If you're a business owner and are looking for ways to outsource tedious documents like W2s, contact us to get a free HR consultation.