Why Is My W2 Higher Than My Salary?
Your W-2 reports total compensation, not just your salary. Learn how taxable benefits and pre-tax deductions affect the final numbers on your form.
It is a common point of confusion for many employees when they receive their annual Form W-2 and find that the income reported seems higher than their agreed-upon salary. The reality is that the figures on a W-2 are a calculation of total taxable compensation, which includes more than just your base pay. Understanding the various components that contribute to your W-2 totals can clarify why these numbers may not align perfectly with your salary.
Understanding W-2 Income Boxes
Your Form W-2 contains several boxes that report different calculations of your annual earnings. Box 1, “Wages, tips, other compensation,” shows your total income subject to federal income tax. This amount is your gross pay after specific pre-tax deductions, like contributions to a 401(k) or health insurance premiums, have been subtracted.
In contrast, Box 3 reports your “Social Security wages.” This figure represents the portion of your income subject to Social Security tax. Unlike Box 1, retirement plan contributions do not reduce this amount. There is an annual limit on the income subject to Social Security tax, which is $176,100 for 2025.
Box 5 shows your “Medicare wages and tips,” which is the income subject to Medicare tax. A significant difference from Box 3 is that there is no annual wage limit for Medicare tax. Box 5 wages often appear higher than Box 1 wages because it includes the value of pre-tax retirement contributions, and the amount in Box 5 is often the closest figure to your total compensation.
Taxable Compensation Beyond Your Salary
The reason your W-2 may reflect a higher income than your base salary is the inclusion of taxable fringe benefits and other forms of compensation. These are non-cash benefits or additional payments from your employer that the IRS considers taxable income. Your employer must add the fair market value of these benefits to your wages.
Common examples of taxable compensation include bonuses, commissions, and overtime pay. Another frequent item is the value of group-term life insurance coverage exceeding $50,000. If your employer provides this benefit, the cost of any coverage above this threshold is a taxable benefit and must be included in your wages.
Other benefits can also increase your reported income. If you have personal use of a company vehicle, its value is calculated according to IRS rules and added to your W-2. Any educational assistance above the $5,250 tax-free limit is also taxable income. Other items, such as moving expense reimbursements, wellness program rewards paid in cash or gift cards, and lump-sum payouts for unused paid time off (PTO), also count as taxable compensation.
How Pre-Tax Deductions Affect W-2 Totals
Pre-tax deductions create differences between the various income boxes on your W-2. These deductions lower the amount of income subject to certain taxes, but not all taxes are affected equally. This is why the wage amounts reported in Box 1, Box 3, and Box 5 are often different from one another.
Contributions made to a qualified retirement plan, such as a 401(k) or 403(b), reduce your federal taxable income reported in Box 1. However, these contributions do not reduce the wages subject to Social Security and Medicare taxes. As a result, the amounts in Box 3 and Box 5 will be higher than the amount in Box 1.
Other pre-tax deductions have a broader impact. Money you contribute to a Health Savings Account (HSA), a Flexible Spending Account (FSA), or premiums for employer-sponsored health insurance are typically deducted before all taxes are calculated. This means these amounts reduce the income reported in Box 1, Box 3, and Box 5.
Steps to Take for a Suspected Error
If you still believe there is an error on your Form W-2, compare it with your final pay stub of the calendar year. Your year-to-date totals on the pay stub for gross earnings, deductions, and taxes withheld should help identify any specific inconsistencies.
If you cannot reconcile the numbers or identify a mistake, contact your employer’s human resources or payroll department. Prepare specific questions about the discrepancies you found, such as asking for a breakdown of the items included in Box 1.
Should your employer confirm that an error was made, they are responsible for correcting it. The company must issue a Form W-2c, Corrected Wage and Tax Statement. This form will report the corrected figures to both you and the IRS, ensuring you can file an accurate tax return.