How Are Your W2 Calculations Determined?
Explore the calculations that connect your total earnings to the taxable wages and taxes shown on your W-2, influenced by deductions and your W-4.
Each year, employees receive a Form W-2, Wage and Tax Statement, from their employers, a document used for filing personal income tax returns. This form summarizes your total earnings, benefits, and the specific amounts of federal, state, and local taxes withheld from your pay throughout the year. Employers are required by the Internal Revenue Service (IRS) to send these forms to employees no later than January 31.
The calculations behind these numbers are based on a combination of your gross earnings, the benefits you have selected, and the information you provided on your Form W-4.
Determining Your Gross Pay and Taxable Wages
The starting point for your W-2 calculations is your gross pay, which is the total compensation you earn before any deductions are taken out. This includes your salary, wages, bonuses, and any reported tips. From this gross amount, calculations are made to arrive at the figures in Box 1, Box 3, and Box 5, which often differ.
Box 1 reports your “Wages, tips, other compensation,” the amount subject to federal income tax. Box 3 shows your “Social Security wages,” which is the income subject to Social Security tax up to an annual limit of $176,100 for 2025. Box 5 contains your “Medicare wages and tips,” which has no wage limit. The differences between these boxes are attributable to how various pre-tax deductions are treated.
The Role of Pre-Tax Deductions
Contributions to a traditional 401(k) or a similar employer-sponsored retirement plan are a common pre-tax deduction. These contributions are deducted from your gross pay before federal income tax is calculated, which reduces the amount reported in Box 1. However, these retirement contributions do not reduce your wages for Social Security and Medicare tax purposes, so the amounts in Box 3 and Box 5 will be higher.
Other pre-tax deductions have a broader impact. Premiums for health, dental, or vision insurance paid through a Section 125 cafeteria plan reduce all three taxable wage bases: federal income (Box 1), Social Security (Box 3), and Medicare (Box 5). This same treatment applies to contributions made to a Health Savings Account (HSA) or a Flexible Spending Account (FSA), as these funds are set aside before any taxes are assessed.
Calculating Federal Income and FICA Tax Withholdings
The tax amounts reported on your W-2 result from calculations applied to your taxable wages. These withholdings are divided into federal income tax and FICA taxes, which consist of Social Security and Medicare taxes.
The figure in Box 2, “Federal income tax withheld,” is determined by your employer using the information from your Form W-4, such as your filing status and dependents. This information is applied to the withholding tables in IRS Publication 15-T to determine the amount to withhold from each paycheck. The amount in Box 2 is the sum of these periodic withholdings.
Box 4, “Social Security tax withheld,” is found by multiplying your Social Security wages from Box 3 by the employee tax rate of 6.2%. This calculation only applies up to the annual Social Security wage base limit.
Box 6, “Medicare tax withheld,” is calculated by multiplying your Medicare wages from Box 5 by the employee tax rate of 1.45%. For higher earners, an Additional Medicare Tax of 0.9% is applied to wages exceeding certain thresholds. Your employer is required to begin withholding this tax once your wages exceed $200,000, regardless of your filing status.
Calculating State and Local Tax Withholdings
Your employer also withholds applicable state and local income taxes, which are reported in the final boxes of your W-2. These amounts are calculated based on rules separate from federal requirements.
Box 17 shows the total “State income tax” withheld for the year. The calculation depends on the information you provide on your state’s withholding allowance certificate and your state’s tax laws. The amount of wages subject to state income tax is reported in Box 16. This figure may be different from the federal taxable wages in Box 1, as states have their own rules for the taxability of income and deductions.
In some areas, you may also be subject to local income taxes, which are reported in Box 19, with the corresponding local taxable wages in Box 18.
Understanding Informational Boxes and Codes
Beyond the primary wage and tax figures, your W-2 contains several boxes that provide additional information about your compensation and benefits. Boxes 12 and 14 are particularly important, as they use specific codes to report various amounts that can affect your tax return.
Box 12 can have up to four entries, each with a code followed by a dollar amount. Some of the most common codes include:
- D: Your elective deferrals to a 401(k) plan.
- DD: The total cost of your employer-sponsored health coverage, which is for informational purposes only.
- W: Employer contributions to a Health Savings Account (HSA).
- C: The taxable cost of group-term life insurance coverage above $50,000, an amount that is also included in your taxable wages in Box 1.
Box 14 is a catch-all space that employers can use to report items that do not have a designated box. There are no standardized IRS codes for this box, so employers create their own descriptions. Common items found here include state disability insurance (SDI) premiums withheld, union dues, and employer-paid tuition assistance.