What Is State Wages, Tips, Other Compensation?

“State wages, tips, other compensation” represents the total taxable earnings an individual received from an employer within a specific state during the tax year. This amount is reported in Box 16 of the IRS Form W-2, the Wage and Tax Statement. It serves as a foundational figure for determining an individual’s state income tax obligations.

Understanding State Wages, Tips, Other Compensation

This figure generally includes gross wages, tips, bonuses, commissions, and the taxable value of non-cash compensation, as defined by state tax laws. “State wages, tips, other compensation” can differ from federal taxable wages reported in Box 1 of the W-2. This difference arises because states have distinct tax regulations regarding what income is subject to tax and what pre-tax deductions are allowed.

For instance, federal law may allow certain pre-tax deductions to reduce taxable income, but a state’s tax laws might treat those deductions differently. This means an amount non-taxable federally could still be included in the state taxable wage amount. The figure in Box 16 reflects the income a state considers subject to its income tax rules.

Role in State Income Tax Calculation

“State wages, tips, other compensation” is the starting point for calculating an individual’s state income tax liability. Each state that levies an income tax applies its own tax rates, deductions, exemptions, and credits to this base amount. Taxpayers use this figure to complete their state income tax returns.

Some states do not impose a state income tax; in these cases, Box 16 on the W-2 might be blank or show a zero value. For states that tax income, the amount in Box 16 is important for determining the tax owed or refund due. The state income tax withheld from paychecks, shown in Box 17 of the W-2, relates directly to the wages reported in Box 16.

Factors Affecting State Wages

Differences between state and federal taxable wages often stem from variations in the tax treatment of certain pre-tax deductions. For example, contributions to retirement plans like 401(k)s and health insurance premiums are pre-tax for federal income tax purposes, meaning they reduce federal taxable income. However, some states may not allow the same pre-tax treatment for these deductions, leading to a higher state taxable wage amount.

State-specific inclusions or exclusions for certain income types also contribute to these differences. For instance, while unemployment benefits are generally taxable at the federal level, their taxability can vary among states. States also differ in how they tax retirement income, such as pension distributions or 401(k) withdrawals, with some states exempting certain types entirely. Multi-state employment can further complicate state wage calculations, as each state has its own rules for reporting income earned within its borders.