Understanding the differences between the W-2 and the final pay stub

It’s not unusual for the team at IPS to receive a lot of questions during tax season. The one issue that we hear about quite often is why the earnings on employees’ final pay stubs are not the same as their W-2 forms for the year.

It can be confusing. There are definite disparities between the final check and the W-2. So, with the W-2’s about to be issued by employers in January, let’s take a look at some of the more common reasons behind the differences:

Was there non-taxable income collected by the employee during the year?

Non-taxable expenses can include mileage or the purchase of work-related supplies. These costs are usually reimbursed to a worker during a paycheck period. Non-taxable items such as these will show up on an employee’s pay stub, but not the employees W2 as they are not taxable to the employee.

Does the business offer a retirement program?

A 401(k) or other kind of retirement plan may reduce the taxable federal and state wages. The money invested in these programs is a pretax deduction. For example, let’s take an employee who makes $50,000 a year and contributes a pretax 401(k) deduction of $10,000 in a given tax year. The employee’s final pay stub will show that they were paid $50,000 for that year, but their W2 will only report the taxable portion of the employee’s income. In this example that would be $40,000.

What about company health insurance?

Pretax health insurance deductions are another very common reason that pay stub earnings are different from W-2 taxable income. Just like a retirement plan, company health insurance plans can qualify for pretax deductions. The taxable wages in certain boxes on the W-2 will be lowered by the amount of the employee’s pretax health insurance deduction.

Let’s continue with our example above. The same employee making 50,000 per year, contributing 10,000 to a 401(k), now also contributed $5,000 to a qualifying pretax health insurance deduction. The employee’s final pay stub for the year will still show the employee earned $50,000 in wages, but now their W2 Box 1 will show $35,000 in taxable wages. $50,000 in gross earnings less their pretax deductions totaling $15,000.

Overall, it’s important to recognize that an employee’s gross wages may differ from their taxable wages reported on their annual W2. It really depends on their circumstances. For additional consultation, contact your IPS representative.