A W-2 Form is similar to your paycheck stub in that it is loaded with confusing numbers and abbreviations that are fairly important to you and your finances. You need to understand all of the numerals and letters in the different boxes on this vital form so that you can file your taxes correctly and determine if you need to make a change in your paycheck deductions to meet your financial goals next year.

Your employer is required to deliver your W-2 Form by January 31. When it comes, use this handy guide to understand what is on it:

Box 1: Wages, tips, and other compensation. This is your total taxable wages for federal income tax purposes. It includes wages, salary, tips you reported, bonuses, and other taxable compensation, as well as any taxable fringe benefits (such as group term life insurance).

Box 2: Federal income tax withheld. This indicates the total amount withheld from your paychecks during the calendar year for federal income taxes.

Box 3: Social Security wages. This is the total amount of wages that are subject to the Social Security tax, which is assessed on wages of $106,800 or less. If this box shows an amount over $106,800, your employer will need to correct your W-2. If your total wages are under $106,800, the amounts reported in Boxes 1 and 3 should be identical, minus tip income, which is reported in Box 7.

Box 4: Social Security tax withheld. This is the amount of Social Security taxes withheld from your paycheck during the year. For 2011, this tax rate has been reduced to 4.2%. Wages above $106,800 are not subject to the Social Security tax. Thus, the highest possible figure in Box 4 should be $4,485.60 ($106,800 maximum wage multiplied by 4.2%). If you had two or more jobs during the year and your total wages exceed $106,800, you might have paid too much Social Security tax. You can then claim excess Social Security tax withholding as a credit on Form 1040.

Box 5: Medicare wages and tips. This is the amount of wages subject to Medicare taxes. The amount in this box could conceivably exceed the amount in Box 1 because Medicare wages includes deferred compensation, 401(k) contributions or other fringe benefits that are excluded from regular income tax. In other words, this amount usually represents the entire compensation from your job.

Box 6: Medicare tax withheld. This is the amount of taxes that were withheld for the Medicare tax, which is based on a flat tax rate of 1.45%.

Box 7: Social Security tips. This is the amount of tip income that you reported to your employer. The numbers in Box 7 and Box 3 should equal the amount in Box 1, or the $106,800 maximum wage limit for Social Security taxes.

Box 8: Allocated tips. This interesting number indicates tip income that your employer thinks you might have earned but did not report. This amount is not included in the wages reported in Boxes 1, 3, 5, or 7, so you must add this to your taxable wages on line 7 of Form 1040. That will lead to new calculations for your Social Security and Medicare taxes, for which you will need Form 4137. If you have a number in this box, you should probably talk to a tax preparer for advice on the best strategy for filing. You cannot file a 1040EZ if you have an amount in this box, either.

Box 9: No longer used.

Box 10: Dependent Care Benefits. This reflects any amounts reimbursed for dependent care expenses, or the dollar value of dependent care services provided by your employer. Amounts under $5,000 are non-taxable benefits, while amounts over $5,000 are reported as taxable wages in Boxes 1, 3, and 5. If your number is under $5,000, then you must exclude it from any expenses you claim for the child and dependent care tax credit on Form 2441 so that you don’t receive double credit.

Box 11: Nonqualified Plans. This number reflects the amount, if any, distributed to you from your employer’s non-qualified deferred compensation plan or non-government Section 457 pension plan. This amount is included as taxable wages in Box 1.

Box 12: Deferred Compensation and Other Compensation. Several types of compensation and benefits can be reported here. This single letter or double letter code is followed by a dollar amount. The codes are explained as follows:

• Code A – Uncollected Social Security or RRTA tax on tips, to be included as part of your total tax on Form 1040.
• Code B – Uncollected Medicare tax on tips, to be included as part of your total tax on Form 1040.
• Code C – Taxable benefit of group term-life insurance over $50,000, already included as part of your taxable wages in Boxes 1, 3, and 5.
• Code D – Non-taxable elective salary deferrals to a 401(k) or SIMPLE 401(k) retirement plan.
• Code E – Non-taxable elective salary deferrals to a 403(b) retirement plan.
• Code F – Non-taxable elective salary deferrals to a 408(k)(6) SEP retirement plan.
• Code G – Non-taxable elective salary deferrals and non-elective employer contributions to a 457(b) retirement plan.
• Code H – Non-taxable elective salary deferrals to a 501(c)(18)(D) tax-exempt plan.
• Code J – Non-taxable sick pay, not already included in taxable wages in Boxes 1, 3, or 5.
• Code K – Excise tax (equal to 20%) on excess “golden parachute” payments, must be included as part of your total tax on Form 1040.
• Code L – Non-taxable reimbursements for employee business expenses.
• Code M – Uncollected Social Security or RRTA tax on taxable group term life insurance over $50,000 for former employees, to be included as part of your total tax on Form 1040.
• Code N – Uncollected Medicare tax on taxable group term life insurance over $50,000 for former employees, to be included as part of your total tax on Form 1040.
• Code P – Non-taxable reimbursements for employee moving expenses, if the amounts were paid directly to you.
• Code Q – Non-taxable combat pay.
• Code R – Employer contributions to an Archer Medical Savings Account, should be reported on Form 8853.
• Code S – Non-taxable salary deferral to a 408(p) SIMPLE retirement plan.
• Code T – Employer-paid adoption benefits, not included in Box 1 wages. Use Form 8839 to calculate the taxable and non-taxable portion of these benefits.
• Code V – Income from the exercise of non-statutory stock options, already included as taxable income in Boxes 1, 3, and 5. You do still need to report the sale of any stock options on Schedule D.
• Code W – Employer contributions to your Health Savings Account, to be reported on Form 8889.
• Code Y – Salary deferrals under 409A non-qualified deferred compensation plan.
• Code Z – Income received under 409A non-qualified deferred compensation plan, already included in taxable wages in Box 1 and subject to an additional 20% tax plus interest as part of your total tax on Form 1040.
• Code AA – After-tax contributions to a Roth 401(k) retirement plan.
• Code BB – After-tax contributions to a Roth 403(b) retirement plan.
• Code DD – The cost of health insurance provided through your employer.
• Code EE– After-tax contributions to a Roth 457(b) retirement plan offered by government employers.

As a side note, if you have any amounts reported in Box 12, it might be wiser for you to use tax preparation software to calculate your taxes.

Box 13: Check the Box. Check any of the three if:

Statutory employee means that you must report the wages from this W-2 (and any other W-2 forms marked “statutory employee”) on Form 1040 Schedule C. Your wages are not subject to income tax withholding, but are subject to Social Security and Medicare taxes. Statutory employees should probably use tax preparation software to calculate their taxes.

Retirement plan means that you participated in your employer’s retirement plan during the year. This could be a 401(k) plan, profit-sharing plan, or pension plan. As such, your ability to contribute to a tax-deductible traditional IRA might be limited.

Third-party sick pay means that you received sick pay under your employer’s third-party insurance policy, instead of receiving it directly from your employer in your paycheck. Sick pay is not included in your taxable wages.

Box 14: Other Tax Information. Your employer might use this box to report additional tax information. Any amounts reported will have a brief description. Union dues, employer-paid tuition assistance or after-tax contributions to a retirement plan will be reported here, for instance. Some employers report certain state and local taxes in this box as well, such as State Disability Insurance (SDI) premiums.

Box 15: State and State Employer’s Identification. This is your employer’s state and state tax identification number. If you worked for the same employer in multiple states, this box might have multiple lines of information.

Box 16: State wages. This number reports the total amount of taxable wages earned in that state. Again, if you worked for the same employer in multiple states, there might be multiple lines of information.

Box 17: State income tax withheld. This is the amount of state income taxes withheld from your paychecks for the wages reported in Box 16.

Box 18: Local wages. This is the total amount of wages subject to local, city, or other state income taxes.

Box 19: Local income tax withheld. This reports the taxes withheld from your paychecks for local, city, or other state income taxes.

Box 20: Locality name. This contains a brief description of the local, city, or other state tax being paid. The description may identify a particular city or a state tax such as State Disability Insurance (SDI) payments.

Now you have the key to understanding every single box on your W-2. This should help you to plan your finances even more skillfully, as well as file your taxes in a more efficient manner.