08 Mar Walking through some W-2 confusion

Q. I receive a yearly W-2 form for wages but I don’t actually work. In block 12a-C, there is a dollar value for the company’s insurance premium for a policy that exceeds $50,000. Block 1 is a higher dollar amount where Social Security and Medicare taxes are deducted. Block 16 is the same amount as Block 1. Block 17 shows the state tax withheld, and Block 2 shows no federal tax withheld. Are the wages in Block 1 subject to federal tax? Why are Social Security and Medicare deducted?
— Taxpayer

A. To give you an accurate answer, we’d need to know exactly why you’re receiving the W-2 and who it’s from.

We’re going to make some assumptions to answer your question, but you should really speak to a professional who can look at the specifics of your situation.

It’s important to understand that income from many different sources other than employment are subject to federal and state income taxes.

“I am going to assume that this income is either a result of a disability incurred or some sought of severance pay,” said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.. “If your former employer furnished and paid for a private disability insurance plan for you the benefit is taxable, which is why you are receiving the W-2 form.”

Private disability insurance premiums must be paid for by the recipient in order for any future benefit to be tax-free, he said.

If this income is being paid to you as part of a severance package, then it is taxed in the same manner as it would be if you were still going to work everyday and getting paid, Gallo said.

“The reason there is no federal withholding is most likely because you either never requested withholding or the amount you are receiving is below the federal income level that would result in taxes due,” Gallo said. “For example, if Block 1 shows income of $10,000, no federal income tax would be due because of standard deductions and minimum income levels in place, therefore they are not going to withhold any.”

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