Understanding Your W2

What is a W2?

Your W2 is a wage and tax information statement provided to you and both the Internal Revenue Service and the State of Georgia. It is not designed to summarize your earnings but rather to let withholding entities know how much taxable income you had during the calendar year and how much tax was paid by you during the calendar year.

Why isn't the amount in box one equal to my earnings for the year? The amount in box one (Wages, Tips, and Other Compensation) represents the taxable portion of your income and not your total earned income.

Why don't you report total income? The IRS is concerned with the amount of your income that is taxable and how your total earnings were reduced. Total income is not reported on your W2 because … 1) Your employer is accountable for making sure that IRS guidelines are followed when determining your taxable gross. There are frequent reports, audits, and many other tools used to assure that "checks and balances" are in place. And  2) your W2 also contains information regarding where the non-taxable funds were spent. For example, your retirement plan contributions are provided in box 12b. Pre-tax flexible spending accounts are also noted as well as moving reimbursements and other allowances.

How can I check my W2? First, pull out your very last pay stub from the calendar year being reviewed. The tax withholding should be identical to the amounts on your W2. Second, put your total earnings in the calculator and deduct all pre-tax items from that total. That amount should equal the figure in box one.  If it doesn't, usually it's because you have a supplemental life insurance policy and the imputed [Group Term Life Insurance] income needs to be added to your gross.

What is imputed life insurance income?

A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. A policy is considered carried directly or indirectly by the

employer if:

1. The employer pays any cost of the life insurance, or

2. The employer arranges for the premium payments and the premiums paid by at least one

    employee subsidize those paid by at least one other employee (the "straddle" rule).

How is Imputed Life Insurance Income Calculated? The IRS provides a formula for which to use in determining the amount to add back to an employee's taxable gross.

Do I have Imputed Tax even if I pay my own premiums? Yes. Your premiums will be applied to the IRS formula even though the result may be $.00 to be added to taxable gross. Because Mercer is affecting the premium cost through its subsidizing and redistributing role, (payroll deduction, group plan rates, cafeteria plan options, etc) there is a benefit to employees. This benefit is taxable even if the employee is paying the full cost he is charged. Mercer must calculate the taxable portion of the premiums for coverage that exceeds $50,000.

Is this taxable "add-on" the same for everyone? No. It is determined by an employee's individual coverage amount, age, and whether or not their life insurance premiums have been deducted from their taxable gross. We call these pre-tax and after-tax options.

                      Refer to IRS Publication 525 for more information regarding taxable and nontaxable income.