How to Report Pretax Deductions on a W-2
A pretax deduction is a reduction in pay that takes place before taxes are administered. These deductions when applied to a W-2 lower your employee's adjusted gross income, and the amount that he's ultimately taxed by the Internal Revenue Service. The IRS still needs to account for the deductions though, in order to use them when calculating other tax and fee amounts. Because of this, you'll need to list the deductions on the W-2 outside the wage amount, both as the individual deduction itself, as well as a part of the amount listed for employee Social Security and Medicare wages.
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Instructions
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Determine the amount of pretax items that you’re deducting from the employee's gross income. Make a list of all pretax deductions, including items such as health savings account contributions, accidental death and dismemberment insurance premiums, dependent care expenses and medical and dental insurance premiums.
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2
Take the full pay for the year and subtract the pretax deduction amount. Also, subtract any deductions taken from pay due to employee contribution to a 401k or 403b participation and any imputed income. Imputed income is income received in lieu of cash to supplement the actual income amount, such as taxable tuition benefits, employer-paid group life insurance and some moving expenses. Place the total into Box 1 of the W-2, “Wages, tips, other compensation.”
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3
Add the 401k or 403b contribution back to the total in Box 1, so the amount includes the full pay minus the imputed income and the pretax deduction amount. Place the newly adjusted income amount in Box 3, the Social Security wage base. Check the IRS website for the current year’s maximum amount taxable. If the computer amount is more than the maximum, than input the maximum into the box instead.
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4
Use the unadjusted total computed for Box 3 “Social Security wages,” and place in Box 5 under “Medicare wages and tips.” There is no maximum amount.
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5
List the dependent care expenses that the employee received as compensation in Box 10. List the 403b retirement plan deductions Box 12 under Code E, 401k deductions in Box 12 under Code D, and employer paid life insurance in Box 12 under code C.
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Place the total of the remaining pretax deductions into Box 14 of the W-2 next to the "Pre-Tax" listing.
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