While the information contained on your W-2 tax form helps you determine your federal adjusted gross income, the form does not expressly state it. It simply provides one piece of your financial puzzle needed when preparing your annual income tax return. Not every taxpayer receives a W-2 form, just those legally classified as employees.
Internal Revenue Service
The Internal Revenue Service is the federal agency responsible for collecting taxes from American taxpayers each year. The IRS requires taxpayers to complete a number of different forms each year, depending on the taxpayer's financial situation. Not every taxpayer fills out every form. The employer completes a W-2 and mails it to an employee within the month after the tax year ends.
The W-2, or Wage and Tax Statement, is the form on which an employer reports the annual wages he paid to an employee. Each employee receives her own W-2. Each W-2 reflects only what the employer completing the form paid the employee. It does not include wages the employee received from another employer. Therefore, a taxpayer working two jobs would receive two W-2 forms, one from each employer. The form includes wages paid to the employee and taxes withheld during the year, such as Social Security tax, federal income tax and Medicare tax. It also includes other compensation received, such as tips and bonuses. While the employer doesn't typically pay the tips, the employer's customers pay them to the employee while she is working for the employer. Therefore, they are included on the form.
When preparing an income tax return, the taxpayer tallies up his total income received during the tax year. The W-2 form provides one source of documentation regarding that income. A copy of the W-2 form goes to the IRS. The form prevents a taxpayer from underreporting his income, or an employer over reporting what they paid out. The total of all income earned for the year is the employee's gross income. Yet the taxpayer does not pay income tax on the gross income, but on his adjusted gross income.
Calculating Federal Adjusted Gross
The IRS defines adjusted gross income as "gross income minus adjustments to income." When completing the annual tax report, the taxpayer enters information on his return form regarding all income earned, such as wages from a W-2, and allowable deductions. The taxpayer then pays taxes based on the federal adjusted gross income, as opposed to his gross income.