How to Calculate Actual Wages When You Pay Medical Insurance & Contribute to a 401(k)
For federal tax purposes, the amount of money shown in box 1 of your W-2 is the amount of taxable wages your employer paid you during the year. However, especially if you take advantage of company-sponsored health insurance or a 401(k) plan, your actual wages could be a lot higher than the number that shows up on your W-2. If you pay for your medical insurance through a cafeteria plan or make certain retirement plan contributions, those aren't included in your taxable income when your employer completes your W-2. To figure out how much you're actually receiving in salary and benefits, you need to add back those pretax deductions.
Look up your taxable wages for the year in box 1 of your Form W-2. This represents the total amount of income received.Step 2
Add any contributions that you made to your 401(k) plan during the year. These contributions are made with pretax dollars, so they aren't included in your taxable income. For example, if your W-2 says you had $67,000 in taxable income, but you also put $10,000 in your 401(k), add $10,000 to $67,000 to get $77,000.Step 3
Add any contribution your employer makes to your 401(k) plan on your behalf. This income isn't included in your taxable income either because the money is paid into a pretax account. For this example, if your employer chipped in $5,000 for your 401(k), add $5,000 to $77,000 to get $82,000.Step 4
Add the cost of any medical insurance premiums paid with pretax dollars. When you have a salary reduction arrangement with your employer, which means your employer takes money out of your paycheck to pay for medical insurance premiums, those costs aren't counted in your taxable income either. Finishing the example, if your premiums cost $8,000, add $8,000 to $82,000 to find you're actually receiving $90,000 in cash and benefits, even though your W-2 only shows $67,000 of taxable income.
- Do not add back any Roth 401(k) contributions. Roth 401(k)s offer after-tax savings, so your Roth 401(k) contributions are not excluded from your taxable income.
- Even if you contribute to a Roth 401(k) plan, your employer's matching contribution, if any, must go into your traditional 401(k) plan.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."