Employers use Internal Revenue Service (IRS) Form W-2 to report employees' annual income and deductions. The form summarizes the amount of taxable income earned during the year, as well as the total deductions for federal income taxes, state income taxes, Social Security taxes and Medicare taxes. Company benefit program contributions, such as retirement contributions and pension plan additions, are also reported on Form W-2 and indicated by special codes. Box 1 of Form W-2 is used to report the total federally taxable income earned during the year.
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Total the amount of earned income that the employee received during the year. This income includes wages, tips and commissions. Other special payments are also included in this total, such as reimbursements for employee business expenses, taxable benefits from a Section 125 cafeteria plan, executive life insurance payments, non-cash fringe benefits, and certain scholarships and fellowship grants.
Add up the amount of federally nontaxable income that the employee received during the year. Income that isn't subject to federal taxation includes deferred employee contributions to a 401(k) retirement plan or a 403(b) plan.
Subtract the nontaxable income from the total earned income. The result will be the amount of federally taxable income earned during the year. Enter this amount in box 1 of Form W-2.