As a small business owner, you know that sometimes your employees are going to ask you questions about their tax forms.
It’s a common misconception that their last pay stub of the year will always match their W-2, so how can you help them understand the difference?
At CSI Accounting & Payroll, we’ve worked with small businesses for over 50 years. That means we’ve helped thousands of clients advise their employees on:
The difference between a pay stub and a W-2 is that the pay stub shows what the employee’s gross wages and earnings were, while the W-2 shows what the employee’s taxable wages were.
Many of the boxes on a Form W-2 are structured with taxable amounts in the odd-numbered boxes and the actual amounts withheld in the following even-numbered boxes. For example:
Not all boxes fit the odd/even number boxes rule though. For example:
An employee’s last pay stub of the year can be used as their Form W-2 – in a way.
Of course, we always recommend holding onto your tax forms as tightly as possible, but the pay stub can be used in theory. If one of your employees loses their W-2, your payroll provider may be able to issue a replacement.
The pay stub doesn’t always directly show your taxable wage on Form W-2, but it can be calculated. Let’s go into that in the next section.
Is there an easy converter that turns pay stub amounts into Forms W-2? Not that we have found, but that doesn’t mean you can’t manually convert it as long as you know what data is required for each box.
Your final pay stub of the year will include the total amounts withheld for federal income tax (box 2), Social Security tax (box 4), Medicare tax (box 6), and state income (box 17) for that year.
The taxable income may require some calculations. Pre-tax deductions reduce taxable income. The simplest version of this calculation is:
Taxable income = Gross income - Pre-tax deductions
This is true from virtually all pre-tax deductions and can be used to determine boxes 1, 3, 5, and 16, but there is one exception: pre-tax retirement plan contributions.
Pre-tax deductions often include contributions to retirement plans. These contributions lower taxable income for federal income (Box 1) and state income (Box 16) taxable wages. However, the amounts are still subject to FICA tax and therefore won’t affect Social Security (Box 3) and Medicare (Box 5) taxable wages.
So, if you have pre-tax contributions to a retirement account, the amounts in boxes 1 and 16 will likely be lower than boxes 3 and 5.
Contributions to a Roth plan are post-tax, so they should not be factored into the taxable income equation.
Tipped income is handled differently than other income on the W-2. Instead of including tips in Social Security taxable wages (Box 3) it is reported separately in Box 7 for Social Security Tips.
Allocated tips are also reported differently on a W-2. Allocated tips are income reported by an employer on behalf of an employee. This is in addition to tips the employee reported.
There are boxes on the W-2 that may require more data to properly file a tax return. For instance:
In addition, box 12 will need to show a wide range of amounts with a code explaining what the amounts represent. Generally, that will provide additional information about whether certain income is taxable or not.
Keep in mind that some taxes have limits.
Let’s use Social Security as an example. Once an employee reaches a certain taxable threshold, the additional wages are not subject to Social Security tax, so they will not be included in box 3.
Now that you know about why a W-2 may be different than the year’s last pay stub, how someone can essentially use the last pay stub as a W-2, and how to convert a pay stub into a taxable wage, are you ready to check out payroll services?
If so, please consider CSI Accounting & Payroll! To see if we can be a good fit for your business, click the button below for a free consultation:
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