W-2 Wages (Tax course)

The employer's portion of Social Security tax is 6.2%. For 2016, the employee's portion of social security tax is:

6.2%

Entering W-2s in Drake Software

Continue entering information from Form W-2 into the W2 screen. Some important data entry hints are listed below: Federal ID Number: When the employer's Federal ID number is entered, the employer's name and address information is automatically filled from information previously entered into Drake Software. If the employer's information has not been previously entered, the preparer will have to enter it manually. The employee's name and address is automatically filled from data entered on screen 1. Wage information: Enter the wage information for federal and state wages. Wages entered in box 1 automatically flow to boxes 3, 4, 5, 6, and 16. Confirm the actual W-2 numbers and make any adjustments needed for the amounts reported. Enter the state tax in box 17. The state wage automatically flows to the State wages box, but the state tax does not. Enter the local tax and locality, if applicable. This information flows to the state and local return, if applicable. Dependent Care Benefit: Enter the amount of dependent care benefit reported in box 10. This amount will be carried to Form 2441 in the software.

Form W-2 Overview

The most common item that appears on line 7 of Form 1040 is W-2 income. Form W-2 is provided to employees by their employers and has most pertinent information about the financial transactions between the employer and the employee. In this unit, we will explore each line on Form W-2 and explain how to enter the data from a taxpayer's W-2 into Drake Software.

Summary

A W-2 form is provided to employees by their employers and has information about the financial transactions between the employee and the employer. Each box of Form W-2 represents specific data regarding income earned by the employee. This unit reviewed each box of the W-2, including Wages, Tax Withheld, Social Security Wages, and Social Security Tax Withheld. In Drake Software, use screen W2 Wages to enter taxpayer information as it appears on Form W-2. Use the drop lists on screen W2 to indicate specific information about the taxpayer. Preparers can scan W-2 data directly into Drake Software using a 2-D barcode scanner.

Form W-2, Boxes 1 - 3

Box 1 Wages - These are the taxable wages that are carried to line 7 of Form 1040. Tip income is included in box 1, "Wages, tips, and other compensation." Box 2 Federal income tax withheld - The amount of federal withholding is based upon the taxpayer's filing status, number of exemptions, and yearly income. The employee fills out a Form W-4 to indicate to the employer how to calculate the amount of federal withholding. The amount of tax withheld is an anticipation of the tax liability at the end of the year and directly affects the tax liability. Box 3 Social Security wages - This box reports the amount of wages that are subject to Social Security tax. For 2016, the maximum amount of wages that are subject to Social Security tax is $118,500. Wages earned by residents of Hawaii are not limited to Federal social security wage guidelines. NOTE: For 2017, the maximum amount of wages that are subject to Social Security tax is scheduled to increase to $127,200

Form W-2, Boxes 10 and 11

Box 10 Dependent care benefits - The amount of dependent care benefits paid by the employer is reported in this box. Up to $5,000 can be excluded from the employee's wages if the filing status is Married Filing Jointly and $2,500 if the filing status is Married Filing Separately. The computation for the taxable portion of the benefits is calculated on Form 2441 and the taxable amount is included on line 7 of the 1040. Box 11 Nonqualified plans - Distributions from nonqualified retirement plans are reported in this box. Amounts reported in this box are not added to income because they have already been included in box 1.

Form W-2, Box 12

Box 12 - This box is used to report several types of information. Beside each amount in this box is a letter indicating what the amount represents. Some examples are: A An Uncollected Social Security tax that the taxpayer owes because there were not enough wages to cover the Social Security tax reported on tips. C Taxable cost of group term life insurance coverage in excess of $50,000. The amount is included in box 1. D 401(k) contributions J Nontaxable sick pay that is not included in income because the employee contributed to a sick pay plan. Q Nontaxable combat pay

Form W-2, Boxes 13 and 14

Box 13 Statutory Employee, Retirement plan, and Third-party sick pay. If the employee is a statutory employee, contributes to a retirement plan, or received sick pay from an insurance company or other third-party payer, mark the applicable box. A statutory employee is an individual who is not considered to be a common-law employee, but who is treated as an employee for FICA purposes. While these taxpayers have Social Security and Medicare taxes withheld, there is no income tax withheld. Since FICA taxes are withheld, a statutory employee does not have to pay self-employment taxes. Examples of statutory employees are truck drivers, life insurance sales persons, and some home workers. Rather than reporting wage income on line 7 of Form 1040, report this income on Schedule C. Box 14 Other - This box is used to report any other information the employer wants the employee to have.

Form W-2, Boxes 4 - 7

Box 4 Social Security tax withheld - This is 6.2% of Social Security wages. Box 5 Medicare wages - This box reports the amount of wages that are subject to Medicare tax. Unlike the Social Security wages, there is no limit on the amount of wages that are subject to Medicare tax. Box 6 Medicare tax withheld - This amount is 1.45% of Medicare wages. Box 7 Social Security Tips - Social Security and Medicare taxes must be paid on tip income.

Form W-2, Box 8

Box 8 Allocated tips - Restaurants and beverage entities allocate tips to their employees based upon a set computation. The amount of tips allocated to the employee is reported in this box. These tips are not included in box 1 with wages and reported tips. These tips are assigned by the employer to the employee in addition to reported tips.

Form W-2, Boxes A - F

Boxes a-f of Form W-2 contain demographic information about the employee and employer: Box a - Employee's Social Security Number Box b - Employer's federal identification number Box c - Employer's name and address Box d - Control number (optional) Box e - Employee's name Box f - Employee's address

Entering W-2s in Drake Software

In Drake Software, the fields and boxes on the W2 screen correspond to the printed Form W-2. Enter data in the appropriate fields as described earlier in the unit. Select the applicable code from the Special Tax Treatment drop list. Select Military wages, Statutory employee wages for Schedule C, or any other code that is designated on the W-2. NOTE: Drake Software offers preparers the ability to scan W-2s rather than manually entering the information. This is available for W-2s that have a 2-D barcode. Installation of a 2-D barcode scanner is required on the preparer's computer.