Question

Nancy has W-2 gross earnings of $137000. A total of $9700 of her income was deferred to her company's retirement plan, and $5800 was used to pay for her health-care premiums. What will be her W-2 taxable income?.

Answer 1

Answer :

Here is the formula for calculating taxable wages:

(Gross wages) - (Non-taxable wages) - (Pre-tax deductions) + (Taxable benefits) = Taxable wages

Gross earnings = $137000

Less : Deductions

deferred to company's retirement plan = $9700

total amount of your wages that are subject to Social Security tax = 127,300

The Social Security Wage Base for 2019 was $132,900

health-care premiums = $5800

the amount of your wages that are subject to the Medicare tax = $5800 * 1.45%

Explanation for the answer : Form W-2

• Box 1 reports your total taxable wages or salary. The number also includes any tips you reported to your employer, bonuses, and other taxable compensation. Taxable fringe benefits such as group term life insurance are included here, but Box 1 does not include any pre-tax benefits such as savings contributions to a 401(k) plan, 403(b) plan, or health insurance. The number that appears in Box 1 is reported on line 1 of the 2019 Form 1040.
• Box 2 reports how much your employer withheld from your paychecks for federal income taxes. This number is reported on Line 17 of Form 1040.
• Box 3 reports the total amount of your wages that are subject to Social Security tax. This tax is assessed on wages up to $132,900 as of tax year 2019. This "wage base" is adjusted annually to adapt for inflation.3 Check with your employer if Box 3 shows an amount over the wage base. Tips that you've reported to your employer should not be included in Box 3. They're reported in Box 7.
• Box 4 reports the total amount of Social Security taxes withheld from your paychecks. The figure shown in Box 4 should be no more than $8,239.80 because the Social Security tax is a flat tax rate of 6.2% on your wage income up to $132,900. The wage base times 6.2% works out to $8,239.80. Again, check with your employer if the number that appears here is more.
• Box 5 reports the amount of your wages that are subject to the Medicare tax. There's no maximum wage base for Medicare.
• Box 6 reports how much in taxes was withheld from your paycheck for the Medicare tax, which is a flat tax rate of 1.45% of your total Medicare wages as of the 2019 tax year.4 Your Medicare tax withholding that shows in Box 6 should be reconciled on IRS Form 8959 if you're subject to the Additional Medicare Tax, an additional .9% if your annual earnings were more than $125,000 and you're married but filing a separate return, more than $200,000 if you're single, a qualifying widow(er), or head of household, or more than $250,000 if you're married and filing a joint return with your spouse.
• Box 7 shows any tip income you've reported to your employer. It will be empty if you didn't report any tips. Box 7 and Box 3 should add up to the amount that appears in Box 1 if you don't have any pre-tax benefits, or it might be equal to the amount in Box 5 if you do receive pre-tax benefits. The total of Boxes 7 and Box 3 should not exceed the Social Security wage base. The amount from Box 7 is already included in Box 1.
• Box 8 reports any tip income that was allocated to you by your employer. This amount is not included in the wages that are reported in Boxes 1, 3, 5, or 7. Instead, you must add your allocated tips to your taxable wages on line 1 of your Form 1040, and you must calculate your Social Security and Medicare taxes including this tip income using IRS Form 4137.
• Box 9 was once used to report any advance of the earned income credit, but this tax perk ended in 2011 after the Education, Jobs and Medicaid Assistance Act of 2010. Box 9 should, therefore, be empty and, in fact, it's highlighted in red on the 2020 Form W-2.
• Box 10 reports any amounts you might have been reimbursed for dependent care expenses through a flexible spending account, or the dollar value of dependent care services provided to you by your employer. Reimbursements and services under $5,000 aren't taxable, but any amount over $5,000 should be reported as taxable wages in Boxes 1, 3, and 5. Dependent care benefits are reported on Form 2441.7
• Box 11 reports any payments that were distributed to you from your employer's non-qualified deferred compensation plan or a non-government Section 457 pension plan. The amount in Box 11 is already included as taxable wages in Box 1.
• Box 12 applies to deferred compensation and other compensation. Several types of compensation and benefits can be reported in Box 12, so the IRS has simplified this as much as possible by allowing your employer to enter a single letter or double letter code followed by the dollar amount of your compensation. Ask your employer to determine what the code means.
• Three check boxes appear in Box 13. The first will be marked off if you're a statutory employee. This means that you would report the wages from this W-2—and any other W-2 forms you receive that are marked "statutory employee"—on Schedule C of Form 1040. Your wages aren't subject to income tax withholding so you should see a zero in Box 2, or it should be blank. Earnings are subject to Social Security and Medicare tax, however, so Boxes 3 through 6 should be filled out. These boxes will also be checked if you participated in your employer's retirement plan during the tax year. This might be a 401(k) plan, a 403(b) plan, SEP-IRA, SIMPLE-IRA, or another type of pension plan. Finally, these boxes will be checked if you received third-party sick pay under your employer's third-party insurance policy instead of receiving sick pay directly from your employer as part of your regular paycheck. Sick pay is not included in your Box 1 wages, although it is usually subject to Social Security and Medicare taxes.
• Your employer might report additional tax information in Box 14. Any amounts reported in Box 14 should include a brief description of what they're for. Union dues, employer-paid tuition assistance, or after-tax contributions to a retirement plan can be reported here. Some employers will report certain state and local taxes in Box 14. Ask your employer if you're not sure what the code in Box 14 stands for.
• Box 15 reports your employer's state and state tax identification number.
• Box 16 reports the total taxable wages you earned in that state. There might be multiple lines of information here, too, if you worked for the same employer in multiple states.
• Box 17 reports the total amount of state income taxes withheld from your paychecks for the wages reported in Box 16. These taxes might be deductible as part of the deduction for state and local income taxes on Schedule A of the federal Form 1040 if you itemize your deductions.
• Box 18 reports wages that are subject to local, city, or other state income taxes.
• Box 19 reports the total taxes withheld from your paychecks for local, city, or other state income taxes. This amount might also be deductible as part of the deduction for state and local income taxes if you itemize your deductions on Schedule A.
• Box 20 provides a brief description of the local, city, or other state tax being paid. The description might identify a particular city or it might identify a state tax such as state disability insurance (SDI) payments