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Increasingly complicated tax forms can be decoded

Posted online

by Marita L. Dreiling

for the Business Journal

Your business soared to proportional heights this year. You've sold more than ever and relied on your accountant and bookkeeper to complete paperwork which you normally prepare.

But when the CPA sent over your W-2s, the wages didn't look right. The letters in boxes 13 and 14 and X's in box 15 make your W-2 look like alphabet soup.

Each year the IRS demands more of payroll professionals. Payroll taxes have increased over the past six years, costing a business between 8 percent and 12 percent in payroll tax expense. And the payroll reporting forms 941, 940, W-2 and W-3 leave no margin for error. Not only can the IRS kick back an incorrect year-end payroll form, but so can the Social Security Administration and the state.

The numbers on your W-2 which make up wages (Box 1), Social Security wages (Box 3) and Medicare wages and tips (Box 5) can encompass a variety of combinations. If you participate in a cafeteria plan, the deductions for health, child care, medical and dental aren't taxable and therefore not included in these boxes. This makes your taxable income lower.

Participation in a cafeteria plan also reduces your Social Security and Medicare wages. Less is withheld from each paycheck, and therefore the company contributes less when matching Social Security and Medicare. This is a win/win situation for employees and employers.

More than hard-earned wages are included in Box 1 of your W-2. Group term- life insurance over $50,000 and auto benefits of a company car are taxable for federal and state withholding, in addition to Social Security and Medicare taxes. Personal-use-of-auto benefits are also included in Box 12 as a taxable fringe benefit.

Health insurance paid on behalf of an S corporation shareholder is taxable only for income tax purposes. Contributions or elective deferrals to a retirement plan, such as a 401(k), are not taxable for income tax purposes but are for Social Security and Medicare. These are some of the combinations which make up the differences in boxes 1, 3 and 5 of your W-2.

The maximum in Box 4, Social Security tax, should not be more than $4,054.80. The maximum taxable wages for Social Security purposes for 1997 was $65,400. This rises to $68,400 for 1998.

At a glance, common code letters in boxes 13 and 14 include:

?Letters D, E, F, G, H and S are for specific elective deferrals to a retirement plan. The letter designates the retirement plan type, and usually the amount following the letters is what you contributed to the plan that year.

?Letter C is for the cost of group term- life insurance over $50,000. The IRS provides tables based on age and amount of coverage to determine how much to add to your W-2.

?Letter R is for amounts your employer contributed to a medical savings account on your behalf.

The boxes marked in Box 15 of your W-2 affect your individual tax return.

?If the pension plan or deferred compensation boxes are checked, this may restrict contributions to an IRA.

?The household employee box should only be marked if you are an in-house nanny or housekeeper.

?The deceased box may signal the result of a final income tax return.

?Statutory employees include insurance salespersons, certain other salespersons and agent drivers. There is no federal withholding, but they are subject to Social Security and Medicare.

What is on your W-2 determines how your income tax return is prepared. It is important to obtain a correct W-2 to avoid problems in later years. Your W-2 and tax return not only credit you for income taxes withheld but also credit your Social Security and Medicare accounts.

With an alleged shrinking budget deficit and decreased income taxes, you're probably wondering where the government is raising revenue. Payroll taxes have crept up every year, and it is essential to keep this huge expense under control. Meanwhile, the forms get more complicated with every tax-saving strategy.

Consult your tax adviser for savings in payroll taxes. Your W-2 may look like a preschooler's alphabet listing, but the tax savings can be tremendous.

(Marita L. Dreiling, CPA, is a member of the Springfield-based accounting firm of Kirkpatrick, Phillips & Miller, CPAs, PC.)

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