Why Is My W2 Lower Than My Salary?
Understand why your W-2 shows a lower wage than your salary by learning the key distinction between your total earnings and your taxable income.
It is common for the wage figure on your annual Form W-2 to be lower than your total salary. The Form W-2 is the Internal Revenue Service (IRS) document that reports your annual earnings and taxes withheld by your employer. The figure in Box 1, “Wages, tips, other compensation,” represents your federally taxable income, not your gross earnings, due to various pre-tax deductions.
Gross Pay Versus Taxable Income
Gross pay is the total amount of money you earn from your employer before any deductions are taken out, including base salary, bonuses, or overtime. It is the top-line number on your pay stub reflecting your full compensation.
Your taxable income is the portion of your gross pay that is subject to federal income tax, which is the number reported in Box 1 of your W-2. To arrive at this figure, your employer subtracts specific pre-tax deductions for certain benefits and savings plans from your gross pay.
Common Pre-Tax Deductions That Reduce Taxable Income
The difference between your salary and your W-2 wages is primarily due to pre-tax deductions. These are amounts subtracted from your gross pay for various benefits, which reduces your current tax liability.
Retirement Plan Contributions
Contributions to employer-sponsored retirement plans are a common pre-tax deduction. When you contribute to a traditional 401(k), 403(b), or the Thrift Savings Plan (TSP), that money is taken from your paycheck before federal income taxes are calculated. For example, if your annual salary is $60,000 and you contribute $5,000 to your 401(k), your taxable income in Box 1 is reduced to $55,000. Contributions to a Roth 401(k) are an exception, as they are made with post-tax dollars and do not reduce your Box 1 taxable income.
Health Insurance Premiums
The portion of health insurance premiums you pay is another common pre-tax deduction. If you are enrolled in your company’s medical, dental, or vision insurance plans, your share of the premium is deducted from your gross pay. This is often administered through a Section 125 cafeteria plan, which allows employees to pay for these benefits on a pre-tax basis.
Flexible Spending Accounts and Health Savings Accounts
Contributions to Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) also reduce your taxable income. An FSA allows you to set aside pre-tax money for out-of-pocket healthcare or dependent care expenses. An HSA, which is paired with a high-deductible health plan, lets you save for medical expenses using pre-tax dollars.
Other Fringe Benefits
Some employers offer additional fringe benefits that can be paid for with pre-tax dollars, such as commuter benefits for parking or transit passes. Another item that can affect your W-2 is group-term life insurance. The cost of employer-paid coverage up to $50,000 is a non-taxable benefit. However, the cost for coverage exceeding $50,000 is considered taxable income and is added to your reported wages.
Understanding Different Wage Totals on Your W2
Different federal taxes are calculated using different definitions of taxable wages, which is why Boxes 1, 3, and 5 on your W-2 often show different amounts.
Box 1 shows your wages for federal income tax purposes, after all eligible pre-tax deductions have been subtracted.
Box 3 reports your Social Security wages. This amount can be higher than Box 1 because contributions to retirement plans like a 401(k) reduce your income for federal income tax but not for Social Security tax. Deductions for health insurance and FSAs do reduce Social Security wages. There is an annual limit on earnings subject to Social Security tax, which is $176,100 for 2025.
Box 5 shows your wages subject to Medicare tax. This amount is often similar to Box 3, as it is also reduced by health insurance and FSA deductions but not by retirement plan contributions. A significant difference is that there is no annual wage limit for Medicare tax, so for high earners, Box 5 can show the highest wage figure.
How to Reconcile Your W2 With Your Pay Stub
You can verify the accuracy of your W-2 by using your final pay stub of the year. This document contains all the year-to-date (YTD) information needed to perform a simple reconciliation. First, locate the YTD gross pay figure on your final pay statement. Next, find the YTD totals for all of your pre-tax deductions. These typically include contributions to traditional 401(k) plans, health, dental, and vision insurance premiums, and any funds you directed to an FSA or HSA.
Sum up all of these YTD pre-tax deductions to get a single total. Subtract this total amount from your YTD gross pay. The resulting number should match the wage amount reported in Box 1 of your Form W-2. If there is a discrepancy, it is advisable to contact your company’s payroll department for clarification.