At the end of the year, your employer compiles a W-2 for you to show both you and the Internal Revenue Service how much money you made during the year. Box 1 of your W-2 shows the amount of your wages that are subject to federal income taxes, which is the amount that you must report when you file your income taxes. This amount isn’t affected by what you report on your W-4 form.
Pre-tax deductions from your paycheck, like retirement plan contributions and health insurance, reduce your Box 1 income on your W-2.
Understanding W-2 Deductions
Box 1 of your W-2 doesn’t necessarily equal your wages for the year because some expenses paid directly by your employer from your pay serve as gross income deductions because they are made with pre-tax dollars. These include contributions you make to a traditional 401(k) or 403(b) retirement plan, health insurance premiums and health savings account or flexible savings account contributions.
For example, say that your salary is $62,000, but you contribute $2,000 to your 401(k) plan, pay $2,500 in health insurance premiums and contribute $1,000 to your FSA. Your W-2 would show $56,500 of taxable income in Box 1. You'd report that amount – rather than the $62,000 total – on your taxes.
Withholding Doesn’t Reduce Gross Income
But it’s not as easy as just a listing of all the items commonly withheld from gross pay because not all items withheld reduce your taxable income. First, there’s no reduction in your gross income for any taxes withheld, even though if you itemize the amount of state and local income taxes you pay, you could reduce your tax bill. Second, any after-tax contributions to retirement plans, such as a Roth 401(k) or Roth IRAs, won’t have any effect on the amount in Box 1 because those contributions are still included in your taxable income. Finally, Box 1 won’t be affected by any tax deductible expenses you pay out of pocket because you would deduct those separately on your income tax return.
For example, say you make a $2,000 contribution to your traditional IRA or a $1,000 donation to charity. While both of those could reduce your taxable income on your tax return, they won’t reduce the amount shown on your W-2.
Moving Expenses Deduction Eliminated
The tax law changes for 2018 have resulted in a major change in how moving expense reimbursement is reported. With the exception of certain moving expenses for members of the Armed Forces, the moving expenses deduction has been eliminated for the 2018 tax year. As a result, if your employer pays moving expenses on your behalf, those expenses increase your Box 1 income because they can’t be excluded.
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."