Tax season can be scary, but it doesn’t have to be. We can explain all the complicated documents and deductions, starting with the W-2 and 1099 forms for reporting your income.
If you have any kind of employment, your employer (either a company, entity or individual) likely reports your income to the IRS using a W-2 or 1099 form. While W-2 forms are primarily used for employee income, 1099 forms have a variety of uses. They can report the money you made as an independent contractor, including gig work, or even income from interest and investments.
To help you get ready for tax season, we’ll take a look at both types of forms, so you can file confidently.
What is a W-2 form?
A W-2 form, officially called a Wages and Tax Statement, is the main document that tracks an employee’s earnings. If you get a W-2, it means you’re an employee and not considered self-employed.
The main things a W-2 reports are your income, pretax withholdings and benefits you received during the prior year from the company that employs you. It's calculated based on your paycheck withholdings. You can choose how much your employer should withhold by filling out a W-4 form and submitting it to your employer, which you're typically asked to do when starting a new job.
The IRS needs a record of your income and the amount you withheld for taxes. Social Security also tracks your W-2 to determine your future benefits.
Pay close attention to Boxes 1, 2, 3, and 16 on your W-2. These boxes deal with the amount of your income that your state and federal government can tax. They’re important to understand because they relate to how much money you’ll get back after filing your taxes (tax refund), or if you still owe money (tax bill).
Here’s a table detailing each of these key boxes and how to understand them.
Box 1 Wages, tips, other compensation This shows the dollar amount of your regular job income that the federal government can tax, minus pretax deductions such as contributions to tax-advantaged retirement accounts. Box 2 Federal income tax withheld This is the amount your employer took from your paycheck during the year and sent to the IRS. Box 3 Social security wages This shows your taxable income for Social Security. It may be higher than Box 1 because some deductions, like 401(k) contributions, don’t apply here. Box 16 State wages, tips, etc. This is how much of your income your state can tax. It may be different from the amount in Box 1, as your state’s rules about what is considered taxable income might be different from federal rules. Box 17 State income tax Similar to “federal income tax withheld” in Box 2, this shows how much your employer already withheld from your paycheck and paid to your state’s tax agency. It may be blank if your employer didn’t withhold state taxes or if you live in a state with no income tax.
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