What Do the Letter Codes Mean in Box 12 of My W-2 Form?

Tax News

Box 12 on your W-2 form reports several different types of compensation and benefits. If applicable, this box will indicate a single or double letter code followed by a dollar amount. Here’s what those codes mean:

Box 12 code
Meaning

A
Uncollected Social Security or RRTA tax on tips

B
Uncollected Medicare tax on tips (but not Additional Medicare Tax)

C
Taxable cost of group-term life insurance over $50,000 (included in your wages in boxes 1, 3, and 5)

D
Elective deferrals to a section 401(k) cash or deferred arrangement plan, including a SIMPLE 401(k) arrangement

E
Elective deferrals under a section 403(b) salary reduction agreement

F
Elective deferrals under a section 408(k)(6) salary reduction SEP

G
Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan

H
Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan

J
Nontaxable sick pay (information only)

K
20% excise tax on excess golden parachute payments

L
Substantiated employee business expense reimbursements

M
Uncollected Social Security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only)

N
Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (but not Additional Medicare Tax — former employees only)

P
Excludable moving expense reimbursements paid directly to a member of the U.S. Armed Forces for military orders

Q
Nontaxable combat pay

R
Employer contributions to an Archer MSA

S
Employee salary reduction contributions under a section 408(p) SIMPLE plan

T
Adoption benefits

V
Income from exercise of non-statutory stock option(s)

W
Employer contributions (including employee contributions through a cafeteria plan) to an employee’s health savings account (HSA)

Y
Deferrals under a section 409A non-qualified deferred compensation plan

Z
Income under a non-qualified deferred compensation plan that fails to satisfy section 409A

AA
Designated Roth contributions under a section 401(k) plan

BB
Designated Roth contributions under a section 403(b) plan

DD
Cost of employer-sponsored health coverage

EE
Designated Roth contributions under a governmental section 457(b) plan

FF
Permitted benefits under a qualified small employer health reimbursement arrangement

GG
Income from qualified equity grants under section 83(i)

HH
Aggregate deferrals under section 83(i) elections as of the close of the calendar year

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Schedule C: Reporting Self-Employment Income from Multiple Sources

Tax News

Updated for tax year 2023.

If you’re self-employed and have many different business activities or side hustles, it can be confusing to know how to report them all on your taxes. There are certain rules you need to follow, like grouping similar activities together and keeping different ones separate. Let’s take a closer look at how to report your business activities so you can avoid problems with the IRS and make things easier for yourself this tax season.

At a glance:

You can group similar business activities on one Schedule C, but keep unrelated activities separate.
Spouses running separate businesses can’t combine them on one Schedule C.
You can’t group activities together to hide losses, but losses from one activity can still offset gains from another.
Report all self-employment income, regardless of the amount, for tax purposes.

How to decide if you have one or more Schedule C business

Many self-employed individuals often have more than one activity going at once. To make things a little easier when record-keeping and filing your self-employed taxes, you can report closely related activities together on one Schedule C. However, if you make income from two or more unrelated activities, you must report them all on separate Schedule Cs.

For example, let’s say you are a self-employed dog groomer, but you also offer pet-sitting services occasionally on the side. These two activities are similar enough that you could simply consider yourself a pet care business and group them together on one Schedule C.

As another example, let’s say you earn income selling handmade items online and you also drive for Uber or Lyft on the weekends. These are two distinctly different types of business activities, meaning you’d need to fill out separate Schedule C forms for each income source.

Tax Tip: Businesses run separately by two spouses are considered unrelated activities. If you are actively participating in one business but not in another, you cannot combine them on one Schedule C.

Can I group all my activities into one business to avoid keeping track of separate income and expenses?

It would be great if you could just keep track of one set of income and expenses, even if you have more than one business activity. But in reality, this isn’t in your best interest. Keeping separate records, including separate records for business expenses — such as office supplies for your Etsy store and vehicle mileage for your Uber side gig — may be more work, but it’s worthwhile to make sure you can take all the tax deductions for which you qualify.

Can I combine different activities into one business to avoid showing a loss from one activity?

The IRS expressly states that you cannot combine two activities for the purpose of hiding a loss from one of the activities.

Besides, combining the two activities into one business probably would not affect your total tax liability. As long as your losses are not from passive activities, the loss from one business will reduce your total gain from all businesses.

Won’t my business be considered a hobby if I don’t show a profit in two out of five years?

Your business may be considered a hobby if you don’t make a profit for two out of the last five tax years, but that’s not always the case.

Some businesses never make a profit but are still never considered a hobby. That’s because the profit rule-of-thumb is only one thing the IRS looks at to decide if a business is a hobby.

If your business is operating at a loss, you can still show that it is a business, not a hobby, by operating it in a business-like manner. This means keeping good records and intending to make a profit. And if you own a business that is unlikely to be a hobby, such as a retail store or a construction company, you should have no problem convincing the IRS that you are operating a serious business.

Is there a minimum amount of money I have to make in an activity before I report it?

There is no minimum amount of self-employment income you must earn before you have to report it. You must always report all income, including barter income and income received in cash, regardless of the amount.

This misconception may come from the rules for self-employment tax, which state that you do not have to pay self-employment tax unless you earn $400 or more in total self-employment income.

How is self-employment tax calculated when I have more than one business?

Your self-employment income from all sources is combined to determine if you must pay self-employment tax.

You must pay self-employment tax if your total self-employment income is $400 or more.

Reporting multiple activities as separate businesses won’t reduce your self-employment tax liability. Your net income from one business or another may be under $400, but it’s your total self-employment income that counts. So, if you earned $300 selling items online and another $1,000 driving for Uber, your combined self-employment income would be $1,300, meaning you’d need to pay self-employment taxes on the entire $1,300.

On the other hand, if you have a loss from one business and a gain from another business, the loss from one business reduces your gain from the other. Say you have a clothing store with a net profit of $20,000. You also own an espresso stand, which had a net loss of $10,000. This would give you a net self-employment income of $10,000 ($20,000 – $10,000).

The bottom line

As a self-employed taxpayer, it’s important to know how to report your business activities for tax purposes. Although it may seem complicated, you can simplify the process by grouping similar activities together on one Schedule C form. However, you’ll want to keep unrelated activities separate and keep separate records for each activity to determine what tax deductions you can take.

Ready to file your Schedule C income? TaxAct® Self-Employed can help you report your self-employment income and corresponding tax deductions accurately and confidently.

This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.

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What Is Form W-2, and How Does It Work?

Tax News

Have you ever wondered how to make sense of Form W-2? A W-2 form is more than just a piece of paper; it’s a breakdown of your income, taxes, and other important details that your employer must provide to you and the IRS. This guide will explain everything you need to know about Form W-2, including its significance, what each component means, and how it can affect your taxes and potential refunds. Let’s break it down.

At a glance:

Form W-2 tells you how much tax your employer withheld from your paycheck.
Your employer sends copies of your W-2 form to the IRS, so it’s important to report your income correctly.

What is Form W-2?

The W-2 form is the tax form that an employer must send to their employees and the Internal Revenue Service (IRS) at the end of each year. Officially called your Wage and Tax Statement, your W-2 form reports your annual wages as an employee and the amount of taxes withheld from your paycheck.

If you work for an employer, your employer withholds income taxes from each of your paychecks. That’s because both federal and most state governments collect income tax year-round, not just on April 15, 2024 (the tax filing deadline for tax year 2023). The W-2 form lists exactly how much money you made the previous year, how much went to tax withholdings, and how much of it went to federal taxes and state taxes.

When will I get my W-2 form?

The deadline for employers to send out W-2 forms is Jan. 31, meaning you should receive a Form W-2 Wage and Tax Statement from your employer in January or early February every tax filing season.

Who gets a copy of Form W-2?

You’re not the only one who receives a copy of your W-2 form. Your employer must send copies of your Form W-2 to:

The federal government
Your state government (and your city and local governments)

The IRS calls Form W-2 an informational return because it informs the above parties about your earnings and the amount of taxes you paid for the year.

Who fills out Form W-2?

Form W-2 is one of those tax forms that you, the taxpayer, don’t have to fill out. Your employer provides all the information on the form and mails the document to all parties.

Note: You are required to attach your copy of Form W-2 to your tax return. If you e-file using TaxAct®, we send your Form W-2 information along with your tax return. However, if you are filing your tax return by mail, then you must include a copy with your return.

The anatomy of Form W-2

Form W-2 proves very useful when you file your Form 1040 income tax return. It contains your gross wages, tips, and other compensation for the year, and it also tells you how much money was withheld in federal and state income tax.

Form W-2

Here’s a detailed look at each box of Form W-2:

Starting with the boxes on the left:

Box a: Reports your Social Security number (SSN). Ensure this is correct — an incorrect SSN can delay the processing of your tax return.
Box b: Your employer’s Employer Identification Number (EIN) is reported in box b. An EIN is a nine-digit number assigned to your employer by the IRS and used to identify the tax accounts of employers.
Box c: Reports the legal address of your employer. This may or may not be the actual address of where you work, depending on if your employer has multiple offices with a corporate site.
Box d: Reports the control number used by your employer’s payroll department. This may or may not be blank.
Box e and f: Your legal name, as it reads on your Social Security card, appears in box e, and your mailing address is reported in box f. Double-check both are correct. If that information is incorrect, it could delay the processing of your return.

Here’s a closer look at the boxes on the right:

Box 1: Shows your total taxable wages, tips, prizes, and other compensation for the year, minus certain elective deferrals, such as 401(k) plans, pretax benefits, and payroll deductions. The number from box 1, your income, is reported on line 7 of your Form 1040.
Box 2: Reports the total federal income tax withheld from your pay during the year. This amount is based on the information you included on your Form W-4 with your employer. If you’d rather keep more money in your paycheck each week, you’ll want to adjust your Form W-4 for the next year. Federal taxes withheld in box 2 are reported on line 62 of your Form 1040.
Box 3: Shows your total wages that are taxed for Social Security.
Box 4: Shows the total Social Security taxes withheld from your pay for the year. Unlike federal income taxes, Social Security taxes are calculated based on a flat rate of 6.2% for employees.
Box 5: Indicates all your wages and tips that are taxed for Medicare.
Box 6: The total amount of Medicare tax withheld from your pay for the year. Much like Social Security taxes, Medicare taxes are also figured on a flat rate, which is 1.45% for employees.
Box 7: Shows any tips that you reported.
Box 8: Shows any allocated tips that your employer has figured attributable to you. These are considered as income.
Box 9: Should be blank, as this requirement has expired.
Box 10: Reports the total amount deducted from your wages for dependent care assistance programs. It may also include contributions made by your employer for dependent care on your behalf.
Box 11: Reports the total amount distributed to you from your employer’s non-qualified deferred compensation plan.
Box 12: Reports several different types of compensation and benefits. If applicable, this box will indicate a single or double letter code followed by a dollar amount.
Box 13: Your employer checks the applicable box that pertains to you as an employee.

Statutory employee means employees whose earnings are subject to Social Security and Medicare taxes but not federal income tax withholding.
Retirement plan means you participated in your employer’s retirement plan during the year.
Third-party sick pay means you received sick pay under your employer’s third-party insurance policy.

Box 14: Reports anything that doesn’t have a specific box anywhere else on Form W-2.
Box 15: Includes your employer’s state and state tax identification number.
Box 16: Indicates the total amount of taxable wages for state tax purposes (if you are subject to state income taxes).
Box 17:  Shows the total amount of state taxes withheld from your wages for the year.
Box 18: If you are subject to local, city, or other state income taxes, box 18 reports those wages.
Box 19: Reports the total amount withheld from your wages for local, city, or other state income taxes.
Box 20: Is the legal name of the local, city, or other state tax being reported in box 19.

How tax withholding affects your tax refund

All the information on your Form W-2 helps determine whether you owe more taxes or whether you receive a tax refund when filing your taxes.

If you find that you regularly have a big tax bill in April, you may want to adjust your tax withholdings. This is done using Form W-4. If you have the opposite problem — a big tax refund each April — then you are withholding too much from each paycheck.

You probably filled out a Form W-4 on your first day at work — this form tells your employer how much tax to withhold from your paycheck. You can fill out a new W-4 form if you wish to make changes to your tax withholding. Consider using TaxAct’s W-4 Calculator (Refund Booster1) to see how changes to your withholding allowances could affect your tax refund and paycheck amounts.

Not every taxpayer receives a Form W-2

Freelancers and independent contractors receive Form 1099-NEC, another kind of informational return for non-employee compensation. This form reports all income earned by independent contractors or freelancers during the year.

Note: Prior to 2020, nonemployee compensation was reported using Form 1099-MISC.

Even if you aren’t self-employed, there are also other types of 1099 forms for other types of income, such as a 1099-K for payment cards and third-party network transactions, or a 1099-B for capital gains from selling stocks, or 1099-INT for any interest you received — all of which count as income and need to be reported on your income tax return.

1Refund Booster may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.

The post What Is Form W-2, and How Does It Work? appeared first on TaxAct Blog.

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