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Your W-2 is the end-of-year earnings statement your employer gives to you for tax purposes. It details your gross income and all the tax withheld for the year. These taxes include income tax and Social Security and Medicare taxes. Your W-2 typically also includes other voluntary deductions, such as 401(k) contributions and medical insurance premiums.
The net wage that appears on your W-2 is your take-home pay for the year. It's what's left after your employer makes various deductions from your gross wage. It is a good practice to maintain your pay stubs to ensure that your actual net wage matches what your employer says you earned for the year. Any corrections to your W-2 should be made before your file your tax return.
Income taxes comprise the largest deductions from your W-2. Depending on where you live, you might pay federal, state and local income taxes. The amount of income taxes taken from your gross pay is not some arbitrary number. The level of taxes depends on how you filled out IRS Form W-4 called the Employee's Withholding Allowance Certificate. Form W-4 lets your employer know how much federal income tax to withhold from your paycheck. The more allowances you claim, the less income tax you pay to the government. You're allowed one allowance for yourself, one for your spouse and one for each dependent. You're allowed to update your W-4 as often as necessary to keep up with changes in your life, such as having a baby.
The Federal Insurance Contributions Act tax -- or FICA, for short -- represents Social Security and Medicare taxes. In 2012, the FICA tax rate was 5.65 percent, which breaks down to 4.2 percent for Social Security and 1.45 percent for Medicare. When you gross earnings reach the annual wage limit, which was $110,100 in 2012, your employer no longer has to deduct Social Security taxes from your pay. There is no wage limit with regard to Medicare.
While income and FICA taxes represent involuntary deductions, certain voluntary deductions, such as 401(k) contributions, may also appear on your W-2. You'll notice a separate line item showing your total contributions for the year. Usually companies deduct 401(k) contributions on a pretax basis, which reduces your taxable income. For example, if your gross wage was $85,000 and you made the maximum 401(k) contribution of $17,000 in 2012, the amount of your gross income subject to federal income taxes is $68,000. Companies also often deduct health insurance on a pretax basis. Some companies also offer a cafeteria plan, which allows employees to receive certain pretax benefits such as dependent care assistance and group life insurance.
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