You hand out W-2’s every year. How often do your employees ask “why is that on my W-2”? By the end of this article, you’ll be able to answer many of their questions.
What is a W-2?
The IRS requires employers to report wage, salary and withholding information for each employee on Form W-2. The IRS requires employers to send employees a W-2 no later than January 31st following the close of the tax year, which is usually December 31st.
The W-2 form is divided into boxes that report various items relating to an employee’s income. In box 1 of the W-2 you will find the employee’s annual wage and salary payments with the amount of Federal tax withheld from it in box 2. Box 1 shows compensation items subject to Federal withholding (i.e.: taxable).
Since only a portion of the employee’s income is subject to the Social Security tax, box 3 may report an amount that is less than your total compensation for the year. Effective January 1, 2014, the Social Security base will be $117, 000. Therefore, any compensation in excess of $117,000 will not be subject to Social Security withholding. Box 4 shows the amount of Social Security withheld.
Box 5 shows compensation subject to Medicare Tax. Box 6 shows the amount of Medicare Tax Withheld. Other boxes on the W-2 form include the employee’s compensation subject to state withholding and state income tax withheld. These amounts will appear in Boxes 16, and 17 of the W-2.
Taxable vs. Nontaxable items on the W-2
Is there a difference between the ways a cash gift, bonus, gift card, or a gift of Thanksgiving turkey to an employee is taxed? The answer is Yes and No!
Generally, most gifts given to an employee (ie.turkey) can be excluded from the employee’s gross income and not subject to Federal, Social Security or Medicare withholding. Gifts of turkeys, hams, champagne, flowers, and fruit baskets are generally not taxable to the employee as a deminimis fringe benefit.
The IRS defines “deminimis” as “of minimum value”. Whether a gift to your employee is a turkey or a gift card to a designated store for a designated item (i.e. a gift card to a grocery store for a turkey), if the amount is considered deminimis, it will not be considered taxable to the employee.
However, a gift of cash or its equivalent (i.e. a gift card for general merchandise) normally cannot be considered deminimis, no matter how small the amount. In many cases, cash cannot be excluded from the employee’s income and should be subject to Federal Withholding, Social Security and Medicare.
Common Items on the W-2 Retirement Plans
Employee’s retirement plan deferrals are normally excluded from Federal withholding and do not appear in Box 1. However, the employee deferral retirement contributions are subject to Social Security and Medicare withholding unless the retirement plan contributions are designated Roth IRA contributions. Designated Roth IRA contributions will be subject to Federal, Social Security and Medicare withholding.
Pre-Tax Health Insurance Premiums Pre-Tax Health Insurance Premiums are not included in the employees’ W-2. However, the employer’s cost of health insurance paid on behalf of the employee should appear on the W-2 for employers filing more than 250 W-2’s annually. This amount is informational and appears in Box 12 of the W-2.
Flexible Spending Accounts
Healthcare FSA (Flexible Spending Arrangement) allows employees to set aside earnings to pay for qualified medical expenses in a cafeteria plan. Deferrals of $2,500 or less are considered non-taxable and not subject to Federal, Social Security or Medicare withholding. The amount of FSA deferrals will also appear in Box 14 as other information.
Dependent Care Assistance Dependent Care Assistance- This amount of dependent care assistance can be excluded from taxable compensation up to $5,000 per year. The requirements are that the Child/Dependent care expenses must have been incurred to allow your employees and/or their spouses to work, or look for work.
The provider of the dependent care must be someone the employee and/or his/her spouse cannot claim as a dependent. The eligible programs which qualify for dependent care are: Day camps, daycare centers, nursery schools, and after-school programs.
Additional Fringe Benefit Items on the W-2 Non-Taxable Moving Expenses
Qualified moving expenses are non-taxable to the employee and not included as wages on the employee’s W-2. Examples of qualified non-taxable moving expenses include fares for air, bus or train for the employee and their household members, moving companies including the movers, lodging for the household during the moving process, gas for rental vehicles, tolls, parking expenses and mileage for the use of personal vehicles up to the IRS rate.
Taxable Moving Expenses There are also non-qualified moving expenses that are taxable to the employee and included as wages on the employee’s W-2 in Boxes 1, 3, and 5 and are subject to Federal withholding, Social Security and Medicare. Examples of non-qualified or taxable moving expenses include put are not limited to temporary living expenses(ex. Lodging locally in the town where the employee is moving), pre-move house hunting trips, storage in excess of 30 days, and closing costs to purchase a home
Personal Vehicle The value of the personal use of a company vehicle should be included with wages as compensation and reported on the employee’s W-2. The employer calculation of the value of personal vehicle uses the following methods mandated by the IRS: General Valuation Rule, Cents per Mile Rule, Commuting Rule, and the Lease Value Rule. Depending on your employee’s situation, one of these valuation methods will apply.
Non-Taxable Educational Assistance Amounts paid to an employee up to $5,250 per year are not taxable. The employer cannot offer the employee cash instead of the educational assistance. The program cannot benefit only highly compensated employees.
In conclusion, there are numerous additional items which appear on the W-2 not mentioned in this article. The time is now to contact your organization’s payroll service provider and/or CPA to ensure that all related items are included (or excluded!) from your employees’ W-2 at year end.
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