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Understand why W-2 box amounts are different

by Intuit•12• Updated a day ago

W-2 boxes 1, 3, and 5 amounts may differ if your employee has specific deductions or income types. Pre-tax deductions like retirement or insurance benefits are taxed differently for Federal Income Tax, Social Security, and Medicare.

Select your employee’s situation below to see how these affect the W-2 amounts.

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

Pre-tax deduction, fringe benefit, or company contribution

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: Your employee earns $75,000 and contributes $10,000 to a 401(k)

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 aren't reported in W-2 boxes 12 or 14.

Example: Your employee earns $75,000 and contributes $5,000 to a pre-tax health insurance plan

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

Taxable fringe benefits and specific company contributions (like a Health Savings Account) often increase the amounts in one or more boxes. While your employee doesn’t get this value as cash in their paycheck, the value is included in W-2 amounts for tax calculations.

Example: Your employee earns $75,000 and has Personal Use of a Company Car (PUCC). The value is $5,000.

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

Tips

Employees who earn tips may see different amounts in Boxes 1, 3, and 5. Tips are included in Boxes 1 and 5 totals. For Social Security purposes, they are separated: wages appear in Box 3, and tips appear in Box 7.

Example: Your employee earns $40,000 in regular pay and $10,000 in tips

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

Federal tax exemptions

Certain employees, such as clergy, employees on specific work Visas, or family members of business owners, may be exempt from specific Federal taxes per IRS rules.

Example: Your Visa employee earns $50,000. They’re exempt from Social Security and Medicare, but subject to Federal Income Tax

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 scenario differs from an employee claiming "Exempt" on their W-4 for Federal Income Tax. An employee claiming exempt on a W-4 is still subject to Federal Income Tax calculations, and their pay is included in Box 1.