Why Is Gross Pay Different From Reported W-2 Wages?
Understand how your total earnings are adjusted by pre-tax deductions to determine the taxable income reported on your end-of-year tax forms.
When your year-end Form W-2 arrives, the wage figure in Box 1 may be lower than the total salary you earned throughout the year. This discrepancy rarely stems from an error but from the specific definitions of income used for tax purposes. Understanding how your total earnings are adjusted to become taxable wages involves accounting for certain deductions. These pre-tax deductions are subtracted from your total earnings to determine the final taxable wages reported to the IRS.
Defining Gross Pay
Gross pay represents the total compensation you earn from an employer before any deductions are subtracted. It is the top-line number on your pay stub, reflecting the full amount of your earnings based on your agreed-upon salary or hourly rate. This figure serves as the starting point for calculating your take-home pay and your taxable wages, and it reflects the complete value of the work you performed.
The components of gross pay include more than just a base salary. Common additions to base pay include:
- Overtime pay
- Bonuses
- Commissions
- Tips received from customers
Essentially, any money paid to you by your employer for your services is part of your gross pay before any subtractions are made.
Understanding Your W-2 Wages
Your Form W-2, the Wage and Tax Statement, reports your annual earnings to you and the Internal Revenue Service (IRS) in a specific way. The figure in Box 1, “Wages, tips, other compensation,” represents your federal taxable wages. This amount is your gross pay minus any pre-tax deductions and is the number you use to report income on your federal tax return.
The W-2 provides a detailed breakdown of your earnings for different tax purposes, which explains why several boxes report different wage amounts. Box 3 shows your “Social Security wages,” which are the earnings subject to Social Security tax. This amount can differ from Box 1 because some deductions, like contributions to a 401(k), reduce your federal taxable income but not your Social Security wages. For 2025, these wages are capped at $176,100, meaning you do not pay Social Security tax on earnings above this limit.
Similarly, Box 5 reports your “Medicare wages and tips.” This figure is often different from both Box 1 and Box 3 because most pre-tax deductions for health insurance will reduce your Medicare wages, but retirement contributions do not. Unlike Social Security, there is no wage base limit for Medicare; all of your covered earnings in Box 5 are subject to the 1.45% Medicare tax. An additional 0.9% Medicare tax also applies once your income exceeds thresholds that vary by filing status—$200,000 for single individuals, $250,000 for joint filers, and $125,000 for those married filing separately.
Key Pre-Tax Deductions That Reduce Taxable Wages
The primary reason for the difference between your gross pay and W-2 wages is pre-tax deductions. These are specific expenses subtracted from your gross pay before federal and often state income taxes are calculated. By lowering your taxable income, these deductions reduce the amount of tax you owe. Your participation in employer-offered benefits directly impacts the final wage figure reported to the IRS.
One of the most common pre-tax deductions is contributions to an employer-sponsored retirement plan, such as a 401(k) or 403(b). When you contribute to these accounts, that money is taken out of your gross pay before income tax is assessed, which lowers the income reported in Box 1 of your W-2.
Health-related benefits are another category of pre-tax deductions. The premiums you pay for medical, dental, and vision insurance are deducted from your paycheck before taxes. Contributions made to a Health Savings Account (HSA) or a Flexible Spending Account (FSA) also receive this favorable tax treatment, reducing your taxable income.
Other pre-tax deductions can include payments for commuter benefits, life insurance, or dependent care assistance. In contrast, post-tax deductions, like contributions to a Roth 401(k), are subtracted after taxes have been calculated and do not reduce the taxable wages in Box 1.
Reconciling Gross Pay with Your W-2
You can reconcile the difference between your gross pay and your W-2 wages using your final pay stub of the year. This document contains all the necessary information to see exactly how your employer arrived at the figures on your tax form. The key is to locate the year-to-date (YTD) totals on the pay stub, which summarize all your earnings and deductions for the calendar year.
Start by finding your YTD gross pay on the pay stub. Next, identify all your YTD pre-tax deductions, which should be itemized. These will include deductions for medical insurance premiums, 401(k) contributions, and any funds you directed to an HSA or FSA. Summing up all these pre-tax deductions gives you the total amount that was subtracted from your gross earnings before taxes were calculated.
The calculation to match your W-2 is to take your YTD gross pay and subtract the total of your YTD pre-tax deductions. The resulting number should match the amount reported in Box 1 of your Form W-2. For example, if your YTD gross pay was $60,000 and you had $3,000 in 401(k) contributions and $2,000 in health insurance premiums, your taxable wages would be $55,000.
Your W-2 itself provides clues to this reconciliation in Box 12. This box uses specific codes to report various types of compensation and deductions. For instance, Code D indicates your 401(k) contributions, Code W shows employer contributions to your HSA, and Code DD reports the cost of employer-sponsored health coverage, which is for informational purposes and not taxable.