Incorrect W2: State Taxable Wages

Hi, @acc10t. I'm here to help.

401(k) contributions are generally exempt from Federal income tax withholding but are subject to Social Security and Medicare taxes.

First, let's ensure your QuickBooks Payroll is up-to-date (version 22402). These updates include the most current and accurate rates and calculations for supported state and federal tax tables, payroll tax forms, and e-file and pay options. Generate the W-2 form again after the update and check if the correct amounts are reflected in the form after the update.

Next, if the employee's 401(k) contribution is correctly subtracted from the Medicare wages, but still not from the state taxable wages, this indicates that the payroll item needs to be adjusted to recognize the 401(k) contributions as pre-tax deductions. Since we can't directly edit a payroll item, we'll have to inactivate the current payroll item and create a new one. Here's how:

1. In your QBDT, select Lists, then Payroll Item List.
2. Double-click on the active 401(k) payroll item, then select the Payroll item is inactive checkbox. Then, follow the on-screen steps to make it inactive.
3. Click on the Payroll Item dropdown, then New.
4. Hit Custom Setup, then Next.
5. Select Deduction.
6. Enter a name for the deduction (a name different from the one that's currently active).
7. Fill in the fields for Agency for employee-paid liability.
8. Select the correct Tax tracking type.
9. Select the taxes that are almost always affected by this payroll item.
   
10. Follow the next on-screen steps.
11. Hit Finish.

Once you have done this, ensure that you assign the item to the relevant employee. If you have already created paychecks, you will need to correct the items within them.

Additionally, QBDT has a Payroll Checkup Tool that helps you verify any missing info and possible errors in your payroll forms. Let me add this reference as a guide: Run Payroll Checkup in QuickBooks Desktop Payroll.

You're always welcome in the Community should you have further updates on the 401(k) calculation in your employee's W-2 Form. We'll do our best to assist. Take care.