How to Report Pretax Deductions on a W-2
Because pretax deductions are excluded from certain taxes -- and W-2s are used to report taxable wages -- pretax deductions are not reported as taxable income on the W-2. Instead, employers include pretax deductions in the appropriate boxes of the W-2 for informational purposes.
A benefit is considered pretaxable if it's sponsored by an employer and meets the relevant Internal Revenue Code. Pretax benefits may include health, life and accident insurance; dependent care assistance; adoption assistance; health savings accounts; retirement; and transit and parking. Employers must know the tax implication of each benefit because not all pretax deductions are exempt from the same taxes. For example, traditional 401(k) contributions are exempt from federal and -- in most cases -- state income tax, but not from Social Security and Medicare taxes.
Employees can contribute up to $5,000 or up to $2,500 if married filing separately in pretax dollars annually for dependent care assistance at the time of publication. Amounts over those thresholds are taxable. The employee's dependent care deductions, or the total her employer paid on her behalf, goes in box 10 of the W-2. Amounts over $5,000 or $2,500 if married filing separately are taxable and are included in the employee's federal, Social Security and Medicare wages, respectively boxes 1, 3 and 5.
Many codes are associated with box 12, which is used to report pretax contributions to qualified retirement plans, nontaxable pay and reimbursements along with employee and employer contributions to a health savings plan. Premiums for group life insurance of up to $50,000 are pretax -- amounts over $50,000 go in box 12 and are taxable.
Various types of information can go in box 12, such as uncollected Social Security and Medicare taxes. Employers may consult the W-2 instructions for the appropriate codes to use for pretax deductions. For example, pretax retirement contributions can be coded under D, E, F, G or S, depending on the plan. Code DD applies to the total cost of group health coverage, including employer and employee share.
If an employee contributes to a qualified retirement plan during the tax year, the employer checks the "Retirement Plan" area of box 13.
Any additional information the employer wants the employee to have goes in box 14. This includes pretax health insurance deductions, taxable moving expenses, union dues and educational assistance payment. The employer can use abbreviations to label each piece of information.
The total wages on an employee's pay stub and W-2 may differ if he has pretax deductions because the pay stub shows gross wages and the W-2 reflects taxable wages. To reconcile the two, add the pretax deductions to the taxable wages shown on the W-2. For example, the pretax deductions that are exempt from federal income tax added to the amount in box 1 of the W-2 should equal the gross wages shown on the pay stub.