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November 27, 2018

Getting to Know the IRS W-2 Form

Near the beginning of each year workers in the United States receive from their employers a “Wage and Tax Statement” commonly known as the W-2, after the Internal Revenue Service’s classification of the form. This annual form is, as its name suggests, a statement of taxable wages earned and taxes paid throughout the previous year. Here, Teaching Legal Docs offers some background and explanation about this seemingly ubiquitous document that is very much a part of the American workplace.
Current Tax Payment

Act of 1943

The W-2 form traces its origins back to the beginning of America’s modern income tax policy, a result of the Current Tax Payment Act of 1943. In 1943, the Act introduced the pay-as-you-go income tax, in which a sum of money is withheld by an employer from an employee’s paycheck each pay period in accordance with tax liability. Prior to the pay-as-you-go system, American workers paid an annual lump sum tax payment. Not all American workers paid the annual tax on their income. In fact, most did not. Just four percent of workers in the United States, mostly wealthy, paid the annual income tax. The pay-as-you-go system was introduced in 1944 as an alternative to the annual payment. It was described as more affordable to middle class workers as well as more equitable—all workers would be paying the tax each pay period relative to their income level. “We must assure each citizen the necessities of life at prices which he can pay,” declared Franklin Roosevelt during his 1943 annual budget message. “[I]t is more important than ever before to simplify taxation both for taxpayers and for those collecting the tax, and to put our taxes as far as feasible on a pay-as-you-go basis.” The pay-as-you-go system of income tax withholding from workers started on July 1, 1943, with the first “Withholding Tax Statements” issued to workers in 1944. In the end, the federal government would collect more tax revenue than ever before, from every American worker, directly from employers.

The Boxy Document

As a document, the W-2 is distinctive. It looks boxy—shaped like a rectangle with smaller rectangles with all information contained in rectangles. Traditionally, it is mailed to workers by January 31 of each year, though modern technology allows it to be downloaded faster than the mail. Assuming it is received in the mail, the form is approximately 7½" wide by 13" long, with perforations at approximately every 3" down the form. It consists of a general statement of wages and taxes, followed by three identical copies, each including a standardized version of the same statement. The general statement is meant to be retained by the employee, while the additional copies are meant to be filed with the employee’s federal, state, or local tax return. The reverse of the document offers an explanation of the information presented, as well as information about filing an income tax return.

Like American tax policy, the W-2 has grown more complex over time. Despite these changes, the form is still a relatively straightforward document. Two major moments in W-2 evolution occurred within a 15-year span in the 20th century. In 1965, the formal name of the document changed from “Withholding Tax Statement” to, as we know it today, “Wage and Tax Statement.” The modern look of the document, with information presented in numbered boxes, was introduced in 1978. Subsequent revisions of the form have been minor and took place in 1994 and 2002.

The information contained in the numbered boxes of the W-2 varies slightly with individual workers, but all W-2s contain these basic components.

Boxes A–F

Employee information, including name, address, Social Security number. Employer information is also listed, including name and tax identification number.

Box 1: Wages, Tips, and Other Compensation

Amount of taxable income that an employee has earned over the course of the statement year. In some cases, this is the employee’s total income for the year. In other cases, the number may be less than the employee’s total income because this box includes only “taxable” income, which excludes money set aside to pay for insurance premiums or contributions to employer-sponsored retirement plans.

Box 2: Federal Income Tax Withheld

Amount of money an employer withheld from an employee’s paychecks during the statement year to cover the employ ee’s income tax liability. If the amount withheld is larger than the employee’s liability, the employee will receive an income tax refund.

Boxes 3–6: Social Security and Medicare Wages and Tax Withheld

Amount of an employee’s income subject to social security and Medicare tax, and amounts that an employer withheld to cover that tax liability. The wage amount may be higher than that shown in Box 1 because certain payments, such as contributions to a retirement plan, are taxable in this case. The Medicare tax was introduced in 1966, a result of legislation.

Boxes 7 and 8: Social Security Tips and Allocated Tips

If an employee has a job that includes substantial compensation from tips, these boxes may be used. Box 7 shows the total amount of tips that an employee reported to the employer. This amount is also included in Box 1.

Boxes 9–14

Box 9 is always blank. It used to reflect a certain type of tax payment that an employer could make on behalf of an employee that is no longer allowed by law. Boxes 10–14 are used for a variety of items and will only be filled in if an item applies to an employee. They report things like dependent-care benefit payments, retirement or pension plan contributions, union dues, or education payments.

Boxes 15–20: State and Local Tax Information

If an employee paid any state or local taxes during the statement year, those amounts are reflected here. Boxes 16 and 18 reflect taxable income, which will likely match Box 1; while Boxes 17 and 19 reflect state and local tax withheld during the statement year.

Very Much a Wage and Tax Statement

For many workers, the content of the W-2 might be overlooked, or its reception signals a need to file an income tax return. But it is important to realize that the W-2, and the information contained on it year after year, has come to exist as formal proof of income for a variety of federal and state agencies and other matters. The information on the W-2 is reported annually to the IRS, for example, at the same time that it is provided to an employee. This allows the IRS to track income tax returns, filed or not, to ensure that an employee’s tax liability is met each year. In addition, the information on the W-2 is submitted to the Social Security Administration, which uses it to track annual earnings to calculate payments for workers. An employee’s W-2 might also be used as proof of income in personal matters, such as applying for federal financial aid for college, court proceedings, or credit applications for certain purchases.