Deciphering your W-2 and knowing how to report earnings and withholding gets complicated. If you earn tips on your job, the task takes on another layer of complexity. An important distinction to remember is that your employer withholds—deducts—several different kinds of federal taxes from your earnings and sends them to the Internal Revenue Service. Social Security tax is different from federal income tax. When you file your return, include only the amounts for federal income tax withheld, even if both kinds of tax were withheld from your paycheck and reported on the W-2 your employer gives you. Unfortunately, the IRS does not allow a deduction for either Social Security or Medicare taxes.
Social Security Tips
While the description on this Box 7 sounds like it is money you paid into Social Security, the amount shown is the total tips you reported to your employer and are subject to Social Security withholding. It does not included allocated tips when the establishment splits a percentage of total sales among all employees. For workers who receive tips on top of an hourly wage, the IRS separates out the wages into Box 1 on your W-2 and tips here in Box 7. Both types of earnings are subject to withholding for Social Security, 6.2 percent of earnings as of 2013.
There are three types of withholding at the federal level. When you look at your W-2 form, you will see a cluster of six boxes in the upper right quadrant. Your employer is required to withhold three different taxes from your earnings: federal income tax, Social Security tax, and Medicare tax. The amounts withheld are shown in Boxes 2, 4, and 6. Box 4 includes the Social Security withholding on the amount in Box 1 and Box 7. No tax is withheld from allocated tips.
Reporting Tips on your Tax Return
If you get an hourly rate, the IRS calls that wages. If you do not get allocated tips, add up your Box 1 wages and Box 7 Social Security tips. This amount goes on Line 7 of your 1040 or 1040A, or Line 1 of 1040EZ. If you have other W-2 Forms from other jobs, add up all the wages and tips and put the result on the appropriate wages line.
If you have allocated tips, add Box 1 and Box 8, and put the amount on Line 7 of Form 1040. You cannot use 1040A or 1040EZ. You must also file Form 4137 to calculate the amount of Social Security and Medicare tax you owe on the allocated tips.
Box 2 on your W-2 is the only federal income tax withheld from your wages and tips. This is the number to report on Line 62 of Form 1040, Line 36 on Form 1040A and Line 7 of 1040EZ. You do not include any amounts withheld for Social Security or Medicare, nor any state or local taxes withheld.
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