It’s tax season and we are all trying to make sure we complete our tax returns accurately and on time.
One of the most stressful aspects of filing our tax returns is how to calculate W2 wages. This daunting task can cause us to make mistakes and lead to further complications when filing our tax returns.
Well, you won’t have to worry anymore! We have put together this comprehensive guide to show you how to calculate W2 wages from a paystub, so you can prepare your tax returns properly.
The Guide on How to Calculate W2 Wages
First, you should familiarize yourself with a pay stub. A pay stub is simply a detailed record of how much you have earned during a pay period.
If your employer has provided you with pay stubs, make sure you keep them safe so you can use them as a reference.
You can also create your own pay stubs from your wages. You can check out these fake pay stub template options to get an idea of how to create them.
Here is what to know about calculating your W2 wages:
1. What Is a W2?
You will receive a W2 Form from all of your employers at the beginning of the new year prior to tax return deadlines.
This form will list all the wages you earned during the tax year. It will also show what taxes — federal, state, local, and social security — were withheld from your earnings.
It is imperative that you keep your W2 Forms safe as you will need them as a reference for filing your return.
2. Your Gross Income
Before waiting for your W2 Form to arrive, you can use your pay stub to calculate your wages.
The first step is to find your gross income. Your gross income is the entire amount of money you have earned. In this amount, you do not withhold any taxes.
The gross income will also include any overtime wages, bonuses, and commissions that you earned during the tax year.
3. Non-Taxable Wages
As you will know, not all wages are subject to taxation. As a result, all income that is non-taxable should be removed from your gross income.
Non-taxable wages can include earnings from partnership income, disability wages, employer insurance, and gifts. It is best to consult a tax accountant on whether any additional income of yours is non-taxable.
Once you have subtracted your non-taxable wages from your gross income, set this number aside.
In addition to your non-taxable wages, you may have further deductions that you can remove from your gross income.
Deductions can include insurance (employer and health), retirement accounts provided by the employer, transportation reimbursements, etc.
If you have such deductions, you can remove them from the new gross income that you came to in the previous step.
When you receive your W2 Form, check if the number in Box 1 matches with the new gross income that you have calculated.
5. Annual Taxes
Next, on your pay stub, you want to locate the federal taxes that are to be withheld. If applicable, locate the state and local taxes that are to be withheld.
Once you find these taxes, multiply them by the number of times you get paid in a year. If you get paid once a week, you would multiply the taxes by 52 (52 weeks in a year) and this number is how much tax will be withheld from your gross income.
Finally, subtract this number from your gross income. This amount is your W2 Earnings.
There are additional things to know when calculating your W2 earnings and preparing your tax return.
As we mentioned in the third step, there are non-taxable wages. You should consult a tax accountant to analyze all of your income and decide what income is taxable and what is exempt from taxes.
Some of the exempt income will include:
- Retirement accounts such as 401(K)
- Dependent care reimbursement accounts
- General health insurance
- Vision insurance
- Dental insurance
- Life insurance including group life insurance
But what if you have more than one employer? And what if you freelance on the side? And let us not forget about the passive income you earn from renting out your property!
Multiple Sources of Income
Many Americans will have additional income than what the W2 from their employer shows. That is why, after you learn how to calculate W2 wages you must also calculate all other earnings. You will have to calculate how much tax is to be paid from your other earnings.
If you have more than one employer, you will receive more than one W2. You should repeat the same steps to calculate the W2 wages from all of your employers. You should also use a tax preparation software or consult a tax accountant to see how you can avoid overpaying taxes if this is your situation.
Is My W2 Correct?
As we mentioned in the five steps, the calculation of your gross income should match Box 1 on your W2 Form.
But what happens if it does not match?
The first step is to double-check your own work. It is likely that you may have made a minor mistake in your calculations and gotten the information incorrect. If all goes well, you will come to the same amount in Box 1.
But if your calculations are correct and there is even a slight difference on your W2, there is an issue. Even if the number is off by a couple of dollars, this may delay you in receiving a tax refund.
You must contact your employer immediately and discuss the issue. Mention that you received a different number when you calculated your wages. Once this issue is resolved, your employer will send you a new W2 Form known as a W2c.
This W2c should have accurate information regarding your income, though you should confirm that it does. Make sure you ask them in advance and not as the tax deadlines are approaching.
Prepare Your Tax Return
Now that you know how to calculate W2 wages, you are ready to prepare your tax return.
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