W2 Box 1 vs Box 5: Why Are They Different?
Understand why your federal taxable income in W-2 Box 1 is often less than your Medicare wages in Box 5 due to how pre-tax deductions are applied.
The Form W-2, Wage and Tax Statement, is a document employers must send to employees and the Internal Revenue Service (IRS) at the end of each year. This form reports an employee’s annual wages and the amount of taxes withheld from their paycheck. It is the primary document used to prepare and file a personal income tax return.
Defining Box 1 Wages
Box 1 of the W-2, labeled “Wages, tips, other compensation,” reports the total amount of your earnings that are subject to federal income tax. This figure includes your salary, wages, reported tips, bonuses, and any other taxable compensation you received during the year. The amount in Box 1 is transferred to your Form 1040 to begin the calculation of your federal income tax liability.
It is common for the amount in Box 1 to be lower than your total gross earnings. This difference arises because Box 1 reflects your gross pay minus pre-tax deductions for certain employee benefits and retirement contributions, which are not subject to federal income tax.
Defining Box 5 Wages
Box 5 of the W-2 shows “Medicare wages and tips.” This figure represents the portion of your earnings that is subject to the Medicare tax. The Medicare tax rate is 1.45% for the employee, and employers are required to withhold an extra 0.9% Medicare tax on employee wages that exceed $200,000 in a year.
The amount in Box 5 is often higher than the amount in Box 1. This is because many common pre-tax deductions that lower your federal taxable income do not apply to the calculation of Medicare wages. Unlike Social Security wages, which are reported in Box 3 and have an annual wage limit, there is no income cap for Medicare tax. All of your covered wages are subject to this tax.
Common Reasons for the Difference
The discrepancy between Box 1 and Box 5 stems from pre-tax deductions for specific employee benefits. These deductions reduce your income for federal tax purposes but not for Social Security and Medicare tax purposes. The most frequent deductions causing this difference are contributions to traditional retirement plans, such as a 401(k), 403(b), or a SIMPLE retirement account.
Another reason for the variance is payments for employer-sponsored health, dental, and vision insurance premiums. When you pay for these benefits with pre-tax dollars, the amount is subtracted from your gross pay before federal income taxes are calculated. Contributions made to a Health Savings Account (HSA) or a medical Flexible Spending Account (FSA) through payroll deductions will also reduce the wages reported in Box 1 but not Box 5.
For example, consider an employee with an annual gross salary of $60,000. If they contribute $5,000 to a traditional 401(k) and pay $2,000 for health insurance premiums with pre-tax dollars, their Box 1 wages would be $53,000. Their Box 5 wages would remain at the full $60,000 because these deductions are still subject to Medicare tax.
Locating Deductions on Your W-2
To verify the reasons for the difference between Box 1 and Box 5, you can look at Box 12 of your W-2. This box reports various types of compensation and benefits using specific codes. These codes provide a clear breakdown of the deductions that have been taken from your pay.
The most common codes that explain the discrepancy include Code D, which indicates elective deferrals to a 401(k) plan. You may also see Code DD, which reports the cost of employer-sponsored health coverage; while this amount is not taxable, it shows the value of the benefit. Code W represents employer and employee contributions to a Health Savings Account (HSA). By reviewing the amounts associated with these codes in Box 12, you can reconcile the difference between your federal taxable wages in Box 1 and your Medicare wages in Box 5.