Form W-2 Box 1: A Complete Guide
You’ve started your own business and you’ve worked out the kinks to start efficiently growing your brand. You’ve found a flow in the way you manage your workload, and you’re taking on new projects and clients.
Your business is thriving and you hire employees to help delegate tasks.
Tax season comes along-- you’ve put in the time and energy, but what do you put on your employees W-2 Form?
Here’s What We’ll Cover:
What is Form W-2?
If you’ve been an employee, you’ve had to fill out a W-2 form in order to become enlisted in a company's payroll. You may have breezed through the submissions on that form without fully understanding each question.
When you start your own small business and you’re taking responsibility for your employees payroll, you need to know the full extent of these basic tax forms and what qualifies as taxable income vs nontaxable income.
IRS Form W-2 - Wage and Tax Statement - is an earnings statement responsible for reporting information about your current employees’ annual wages and lists what you’ve paid your employees during that calendar year.
- You must have a completed W-2 form each from each employee that you pay a salary, hourly wage, or other form of compensation
- A W-2 includes information about an employee’s gross wages, withheld taxes, tip income, and deferred compensation.
A completed W-2 form will include IRS required information on an employee
- Taxable wages (federal wages)
- Federal Income taxes
- Self Employment income
- Pre-tax deductions and tax withholdings
Form W-2 Box 1
Filing taxes is a tasking, crucial component of any small business. Learning how to file correctly takes understanding each step and what information you need to acquire. If you’ve used a tax preparer or an automatic payroll software in the past, you may not be familiar with the W-2 Form or other basic tax forms.
As an employee, you are responsible for accurately representing how much you are paying your employees, and any other compensations they’re making under your employment (tips, bonus).
Box 1 contains an employee’s total wages subject to federal income tax. Do not include pre-tax benefits in box 1
Box 1 - Wages, tips, other compensation
The amount in Box 1 is calculated as YTD earnings minus pre-tax retirement and pre-tax benefit deductions plus taxable benefits (i.e.,scholarships, qualifying grants).
Eligible Wages for Box 1
‘Taxable wages’ can be a broad term when it comes to determining taxable income vs nontaxable income. The Internal Revenue Service has made specific terms to follow when filling out Box 1 on your W-2 form.
Form H-2 Box 1 contains an employee’s total wages that are subject to federal income tax. As per the IRS, eligible wages for this submission are as followed:
- Total wages you’ve paid an employee
- Non Cash payments, bonuses, prizes and awards
- Tips reported by the employee
- Specific employee business expense reimbursements
- Taxable cash benefits
- Sick leave wages and employer health reimbursements
- Qualified equity grants
- Amount employer has paid for an employees share of Social Security and Medicare taxes
- Employee and employer contributions to an HSA
- Nonqualified moving expenses and reimbursements
- Long-term care insurance contracts
- Educational assistance payments
- All other compensation (scholarships, grants, etc.)
Tax incentives are exemptions or deductions from taxes owed to the government.
The IRS will give a business a tax incentive to put towards enhancing their business or environmental and charitable contributions.
Tax incentives are distributed according to what the government wants from an industry (i.e. private investment, more jobs, more research & development).
Employee tax incentives are taxable. If you grant an employee a cash bonus, award, or a cash value prize (vacation, lodging, event), this amount must be included as taxable income. Learn more about Tax Incentives.
Why Box 1 Wages May Differ
As an employee gets further in completing their W-2 form, there are many more boxes to fill out and there may be discrepancies in the wages included in each box.
It's not uncommon for other box wages to differ from Box 1 wages.
- The employee earned above the social security wage base
- The employee chose to contribute to a retirement plan or medical savings account
- The employee chose to take part in company adoption assistance program (qualified adoption expenses)
Box 2 on Form W-2 shows how much federal income tax was withheld throughout the year from Box 1.
The numbers in both Box 1 and Box 2 will determine an employee’s tax refund.
Keep in mind that most of the benefits that are exempt from federal income tax are not exempt from Social Security tax (box 3).
Because earnings that are above the Social Security Wage Base are not subject to SS tax, employees do not report them in Box 3.
Discrepancies in W-2 boxes are normal when these common factors come into play. However, it’s important to cross check your information with the information given to you by the employee in order to accurately depict their wages.
Important Takeaways on Form W2 Box 1
As a business owner, it’s your responsibility to collect W-2 Forms from all of your employees that you are paying a salary or hourly wage. You must make sure that these forms are properly filled out.
Form W-2 Box 1 states the wages, tips and any other compensation that an employee has received from their employer.
Box 1 - Wages, tips and other compensation
- Employers must collect a completed W-2 form from each employee
- Employees must state all wages and taxable income that they’re received through your employment
- Earnings that are above the Social Security Wage Base are not subject to SS tax
- Box 2 on Form W-2 shows how much federal income tax was withheld throughout the year from Box 1
- Employees may choose to contribute to a retirement plan, health savings, or partake in an adoption assistance program provided by employer-- which may cause discrepancies in Box 1 wages
- Most benefits that are exempt from federal income tax are not exempt from Social Security tax (box 3).
Other Tax Resources
- What is a W-2 Form? Tips for Employers on Completing Employee Tax Documents | Freshbooks
- Tax Incentives: A Guide to Saving Money for U.S. Small Businesses | Freshbooks
- A Friendly Guide to Schedule C Tax Forms (U.S.) | Freshbooks