You are required to report wages paid to -- and taxes withheld for -- your employees on an annual basis via Form W-2. You file the form with the Social Security Administration and respective state and local agencies; you also give the employee a copy to file with her tax return. If the W-2 is incorrect, it results in problems for the employee when she files her return. Through annual reconciliation, you can avoid W-2 errors.

Report Printing

To verify the information on employees’ W-2s, print an annual payroll register that summarizes wages paid and deductions withheld for each employee. To confirm the totals on the annual register, print four quarterly payroll registers. The totals on the quarterly reports should add up to the numbers on the annual report.

W-2 Identification

To reconcile W-2s, locate the employee’s taxable gross wages in the respective boxes of the W-2. This includes Box 1 for federal wages, Box 3 for Social Security wages, Box 5 for Medicare wages, and, if applicable, Box 16 for state wages and Box 18 for local wages. Each of these boxes represents wages that are subjected to the associated tax. For Box 1, it’s federal income tax; Box 3, Social Security tax; Box 5, Medicare tax; Box 16, state income tax; and Box 18, local income tax.


The amounts shown on the annual register will not match the W-2’s wages if the employee has pretax deductions or nontaxable wages. For example, 401(k) pretax contributions are not subject to federal income tax. The annual register would include the employee’s 401(k) contributions in her gross wages, but Box 1 of the W-2 would not. If the employee does not have any pretax deductions or nontaxable wages, the amounts on the register and the W-2 should automatically match. Also, the amounts on the annual register should match what’s on the employee’s last pay stub for the year.

Taxable Wages Determination

The key to balancing the annual report with the W-2 is to determine pretax deductions and nontaxable wages for the employee in question. Pretax deductions include employer-sponsored and IRS-approved benefits such as health, life and disability insurance; adoption assistance; dependent care assistance; heath savings accounts; 401(k) contributions; and parking and public transportation expense accounts. Nontaxable wages include business expense reimbursements such as mileage and lodging offered under an IRS-approved plan. Because each pretax item has its own tax implication, you must also figure which taxes they are exempt from. For example, pretax health insurance plans are not subject to federal income tax, Social Security tax or Medicare tax, while 401(k) contributions are exempt from federal income tax. In most cases, pretax deductions, including 401(k) contributions, are excluded from state and local income tax; check with your state revenue agency for clarification, as there may be exceptions.

W-2 Calculation

If applicable, subtract the total gross wages shown on the annual register from the total gross wages shown on the employee’s W-2. For example, her total federal wages in Box 1 equals $30,000. She also made $1,500 for the year in pretax 401(k) contributions. The annual register would show her total wages as $31,500. During your W-2 calculation, if the 401(k) is her only pretax benefit and she has no nontaxable wages, simply add the $1,500 to the $30,000 shown in Box 1 of the W-2 to get her true gross wages. An easy way to understand W-2 reconciliation is to remember that the annual payroll register shows the employee’s true wages for the year, while the W-2 shows only her taxable wages.