Why Does My W2 Say I Made Less Than My Salary?
Your W-2 shows taxable income, not gross salary. Learn how your pay is adjusted for tax purposes before being reported on the various wage boxes of your form.
It is common for employees to see a wage figure on their annual Form W-2 that is lower than their gross salary. This discrepancy does not mean your employer made a mistake or underpaid you. The difference arises because the income reported on your W-2 for tax purposes is adjusted by various deductions and contributions made throughout the year.
The Impact of Pre-Tax Benefit Deductions
A primary reason the income on your W-2 is less than your salary is the effect of pre-tax benefit deductions. These are costs for certain employer-sponsored benefits that are subtracted from your gross pay before federal income taxes are calculated. By reducing your taxable income, these deductions lower the amount of tax you owe.
A common pre-tax benefit is health insurance, and your portion of the monthly premium is deducted from your paycheck on a pre-tax basis. Premiums for dental and vision insurance plans are also taken out pre-tax.
Other pre-tax benefits include Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA). If you contribute to an HSA through payroll deductions, those funds are not subject to federal income tax. Similarly, money set aside in a healthcare FSA or a dependent care FSA reduces your taxable income, with the dependent care benefit reported in Box 10 of the W-2.
Other pre-tax benefits can include employer-provided group-term life insurance and certain transportation benefits. For group-term life insurance, the cost of coverage up to $50,000 is a non-taxable benefit. The taxable cost for any coverage exceeding this amount is included in your wages and reported in Box 12 with code “C”. Qualified parking and transit benefits also reduce your taxable income.
How Retirement Plan Contributions Lower Taxable Income
Contributing to an employer-sponsored retirement plan also lowers the income reported on your W-2. When you contribute to a traditional, pre-tax retirement account, such as a 401(k) or 403(b) plan, those contributions are subtracted from your gross pay.
For every dollar you contribute to a pre-tax retirement plan, your taxable income for federal purposes decreases by that same dollar. For example, if your annual salary is $70,000 and you contribute $5,000 to your 401(k), your federally taxable income is based on $65,000.
Your W-2 provides specific details about these retirement contributions in Box 12. This box uses various letter codes to identify different types of compensation and benefits. For instance, employee contributions to a traditional 401(k) plan are identified with the code “D”. Contributions to a 403(b) plan are noted with code “E”.
It is important to distinguish between traditional pre-tax contributions and Roth contributions. While pre-tax contributions lower your federally taxable wages, contributions to a Roth 401(k) or Roth 403(b) do not. Roth contributions are made with after-tax dollars, so they do not lower your federally taxable wages. These after-tax contributions are also reported in Box 12, but they use different codes, such as “AA” for a Roth 401(k).
Understanding Different Wage Boxes on Your W-2
Your W-2 contains multiple boxes for reporting wages, and their amounts often differ for specific tax purposes. The three key boxes are Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages). Each of these boxes reports a wage amount that is subject to a different type of tax.
Box 1 shows your wages subject to federal income tax. This amount is reduced by your pre-tax contributions to retirement plans like a 401(k) and by deductions for health benefits, FSAs, and HSAs. This is often the lowest wage figure among the three boxes if you participate in a retirement plan.
Box 3 reports your wages subject to Social Security tax. Your pre-tax contributions to a 401(k) or 403(b) plan do not reduce your Social Security wages. Therefore, the amount in Box 3 is often higher than the amount in Box 1. However, deductions for health, dental, and vision insurance, as well as FSA and HSA contributions, do reduce your Social Security wages. Box 3 has an annual wage base limit, which is $176,100 for 2025; any earnings above this amount are not subject to Social Security tax.
Box 5 shows your wages subject to Medicare tax. Similar to Social Security wages, the amount in Box 5 is not reduced by your retirement plan contributions but is reduced by pre-tax health and benefit deductions. Unlike Social Security, there is no wage limit for Medicare tax; all of your covered compensation is subject to it. This means for most employees, the wage amount in Box 5 will be identical to the amount in Box 3, unless your income exceeds the Social Security wage base.