What Are the Tax Differences Between W-2s & 1099-Rs?
If you have income from a job, your boss sends you a W-2 each year to report how much you made and how much you paid in taxes to the federal, state and local government. When you retire and start drawing a pension or withdrawing from a workplace retirement plan, the administrator of that plan sends you a 1099-R detailing how much you received and how much of that benefit is taxable.
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Taxable Amount
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Your W-2 form lists the wages you earned, broken down into federal taxable wages, Social Security wages, Medicare wages and state and local wages. If you contributed to a 401k or 403b plan, the total federal taxable wages in box 1 will be less than the wage amounts in the other boxes. That is because contributions to a workplace retirement plan are made on a pre-tax basis.
With a 1099-R, the form lists two amounts -- the total amount you received in pension or retirement benefits and the taxable amount. The calculation of the taxable amount is based on a number of factors, including how much you contributed to the pension plan over the years. Use the taxable amount to complete your tax return.
State Taxes
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Nearly every state taxes the earned income reported on a W-2 form, but many states do not tax the pension and retirement income reported on a 1099-R. You can find out if pensions are taxable in your state by checking with your state revenue department. The fax form and instructions for your state should also detail exactly which forms of income are taxable where you live.
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Local Taxes
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When you receive your W-2 form, you should see a box labeled local taxes and another labeled local tax withheld. That is because the municipality or town where you live assesses a local tax on the wages you earn. But as with state taxes, your pension or retirement income may not be subject to taxation. You can find specific information on your local tax form and the accompanying instructions.
Tax Withholding
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The W-2 form you receive from your employer shows the amount you earned in wages during the previous year, along with the amount that has already been paid in taxes. You enter this wage and tax payment information when you complete your tax return.
The 1099-R form you receive from a former employer, benefit plan administrator, brokerage firm or mutual fund company lists the amount you received in retirement income, and depending on the structure of the plan it may list tax withholding as well. If you are receiving regular pension benefits, you can change the amount withheld from your checks by filing a form W-4P with the plan administrator. Reducing the amount withheld means your pension checks will be bigger, but it also means you could owe extra taxes when you file your return.
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