An easy way to distinguish between earnings and Social Security on a W-2 is to remember that the former stands for taxable wages, while the latter refers to taxable wages for the purposes of Social Security tax. Some pretax deductions and nontaxable wages are excluded from both the earnings and Social Security boxes of an employee’s W-2 form, while others are subject to Social Security tax.
W-2 shows all of an employee’s earnings for federal income tax withholding purposes. It does not include wages or deductions that are exempt from federal income tax. Taxable compensation includes regular wages, overtime, vacation and sick pay, severance pay, bonuses, commissions, tips, salaries, back pay and taxable fringe benefits. To figure the amount to put in Box 1, add the employee’s total gross wages for the year, then deduct his nontaxable wages such as business expense reimbursements and pretax deductions such as qualified contributions for 401(k), health insurance, adoption and dependent care assistance and fees for parking and transportation.
Social Security Wages
Box 3 of the W-2 reflects the employee’s wages that are subject to Social Security tax. This amount may not exceed the annual threshold the federal government sets for the year, which is $113,700, as of 2013. Because each pretax deduction has its own tax implication, deductions that are exempt from the amount shown in Box 1 might not be exempt from Social Security tax. For example, an employee does not pay federal income tax on contributions for adoption assistance, but she pays Social Security tax on this money. In this case, you would include contributions for adoption assistance in Box 3 of the W-2, but not in Box 1