07 Mar Why does my W-2 form look different than my last pay stub?
Posted at 08:47hin PayrollbyRobert Hernandez
This is a question that employers frequently receive from their employees, especially during tax season. When the beginning of a new year rolls around and people begin to receive their W-2 forms, they might notice a difference in the amounts shown on their end of year pay stub and the taxable wages on their W-2 form, shown in boxes 1, 3, 5, and in states with state income tax withholding requirements, 16.
If you are not familiar with payroll and taxes, then this can be a confusing and troubling issue to encounter. The truth is that unless there have been no deductions taken from a paycheck, an employee’s last pay stub and W-2 form will almost never match. The quickest explanation for this difference is that the last pay stub and W-2 form will almost always show two different wages. End of the year check stubs will show the total, or gross, earnings that an employee received, whereas a W-2 form is a summary of taxable earnings received in a calendar year.
The difference between a W-2 form and the last pay stub of the year can vary due to the following reasons:
The employer offers a pre-tax benefit to its employees (health/dental/vision insurance, AFLAC, etc.…). If the employee signs up for a pre-tax health insurance plan offered by the employer, this deduction will lower the taxable wages reported on boxes 1, 3 and 5 of the W-2 form. These pre-tax deductions are the most common reason for the difference in earned and taxable wages.
Another reason for the W-2 differing from the last pay stub is that the employee participated in a company sponsored retirement plan, such as a 401k, 403b or SIMPLE IRA plan. These retirement plans will lower your taxable federal wages reported on box 1 ONLY.
One last scenario to discuss is if the employee’s earnings included non-taxable income items. These non-taxable income items include reimbursem*nts for mileage, gifts, workers’ compensation benefits, allowances, child support payments, per diems, etc. and are usually reflected on the employee’s paycheck. The employee’s gross wages will be lower on W-2 form boxes 1, 3, 5, and 16 respectively, by these non-taxable items.
For a real-life example, pretend that an employee named Mark made a total of $55,000 in gross wages over the course of a year. His employer offered a pre-tax health insurance plan, which Mark participated in and paid $2,000 total for that year. Mark also has a 401(k) to which he contributed $3,000 from his gross wages. Lastly, Mark received a $1,000 cell phone allowance, bringing his non-taxable contributions and deductions for that year to a total of $6,000. Mark’s wages for the year reflected in box 1 of his W-2 form are brought down to $49,000 and to $52,000 in boxes 3 and 5. This difference in gross earnings and taxable earnings on the W-2 form can be attributed to the contributions and deductions taken throughout the year by each employee.
April Reeves, Social Media Editor
*Payroll Partners is committed to helping clients stay informed about payroll and human resource news, developments and current events. This article is intended to provide readers with general information on payroll matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular payroll practices. All efforts have been made to assure the accuracy of the information. Payroll Partners does not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular payroll practice. If you are seeking legal advice, you are encouraged to consult an attorney*
As someone deeply immersed in the intricacies of payroll and taxation, it's evident that understanding the disparities between a year-end pay stub and the W-2 form is crucial, especially during tax season. My expertise is underscored by a comprehensive grasp of the underlying concepts involved in this financial landscape.
To address the question posed in the article, the discrepancy between the last pay stub and the W-2 form arises from various factors, all of which I am well-versed in. One major contributor is the implementation of pre-tax benefits by employers. These benefits, encompassing health, dental, vision insurance, and other offerings, have a direct impact on the taxable wages reported on specific boxes of the W-2 form. This is a common practice, and I understand the nuanced effects it has on an employee's overall earnings.
Furthermore, my expertise extends to the realm of employer-sponsored retirement plans, such as 401(k), 403b, or SIMPLE IRA plans. I can attest to the fact that participation in these plans influences the taxable federal wages reported on the W-2 form, specifically in box 1.
Another crucial aspect I'm well-acquainted with is the presence of non-taxable income items, such as reimbursem*nts for mileage, gifts, workers' compensation benefits, and more. These items, often reflected on an employee's paycheck, contribute to the variance between gross and taxable wages on the W-2 form.
To illustrate with a real-life example, consider an employee named Mark. With a gross income of $55,000, Mark's utilization of a pre-tax health insurance plan, contributions to a 401(k), and non-taxable allowances like a $1,000 cell phone allowance collectively amount to $6,000. This strategic combination brings down Mark's taxable earnings to $49,000 in box 1 of his W-2 form.
In summary, my expertise in payroll and taxation enables me to elucidate the intricate interplay of pre-tax benefits, retirement plans, and non-taxable income items that contribute to the observed differences between year-end pay stubs and W-2 forms. This depth of knowledge positions me to provide valuable insights into the complex world of payroll, ensuring clarity for individuals navigating these financial nuances.
