Home Money W2 Boxes Explained – How To Figure Out Where Your Money Is Going

W2 Boxes Explained – How To Figure Out Where Your Money Is Going

by Bethany
w2 boxes explained

At one point, I had no clue what all the boxes in my W-2 meant. I had four jobs in college and every time tax season came around I gathered up my W-2’s and quickly filed with TurboTax. I did not take in the full scope of my money breakdown. This is terribly frightening for where I am at now, but terribly true for where I was at then. Here are the W2 boxes explained.

W-2 Boxes Explained: What did I do with all that money from box 1?

It wasn’t until I started teaching and getting a “real” paycheck from one main source that I investigated the W-2. The (not so) shocking news is that I could see my salary. {Box 1} After scrimping and scavenging every penny while I was in school, that full salary amount felt like a big accomplishment. I was rich! If I was making so much more, then what the heck did I do with all that money? Did it wander off?

Nope, it first went to taxes. Income tax withholding {Box 2} takes a chunk right off the top before I can even get my hands on it. That’s not the only tax that comes out of my paycheck. A certain portion of my salary is subject to Social Security tax {Box 3}. This comes out in a Social Security tax {Box4}. Medicare operates the same way. A portion of my pay {Box5} is subject to Medicare taxes {Box 6}.

W-2 Story

W2 Boxes Explained: Why so many blank boxes?

I always had a few blank spots on my W-2 as a teacher. We don’t ever get tips. The government doesn’t count the penis drawings on classroom desks or the gum stuck underneath them. If I did get tips and reported these to my employer than a certain portion of this could be subject to social security taxes {Box 7}. Any allocated tips given to you by your employer would also be listed on the W-2 {Box 8}.

As much as I would love to claim my extremely needy cats as “dependents”, it’s not allowed. As a pet mom, that means I don’t receive dependent care benefits {Box 10}. I also didn’t participate in any “Nonqualified plans” like a deferred compensation plan paid out by my employer making room for another blank box {Box11}.

Paying into retirement, Box 12

This one was a true shocker for me. I was contributing to my retirement every month. I checked this box when I started teaching and called it good. But when I saw the small 5% {Box 12a} that was going towards my teacher pension (similar to an employer 401k) my heart sunk. This had to change, but I will get to that below.

(Box 13 has three sections. One if you’re subject to Social Security and Medicare taxes, but not federal income taxes. A box that your employer checks if you have access to certain retirement plans. And lastly a box your employer checks if you get third party sick pay. )

The bottom W2 boxes explained: more money wandering off

State and local taxes still haven’t been covered yet. State income tax and local income tax were also withheld from my pay {Box 16-19}. This may not be true for you and depends on your local area taxes. If you didn’t have this money automatically taken out of your paycheck, then you should plan to owe a chunk when filing your taxes.

Use your W-2 to look at the big picture

Once I had my W2 boxes explained, I had a much better idea of the big picture. Instead of just plugging numbers in and trusting the software, I had a handle on the money. When this happened I could look at the big picture. Back to the question I asked after looking at Box 1, “What the heck did I do with all that money?”

Even after all the deductions and taxes, I am bringing home a good salary. It’s helpful for me to think about that on a larger playing field. Below is an exercise so you can look at your money on a larger scale as well.

Be ambitious with your Box 1 and try this:

1. Calculate your after-tax income.

Taxes to take out of your overall salary:

  • State
  • Local
  • Income
  • Medicare
  • Social Security

If you don’t have a W-2 right now you can still do this with one paystub and then multiply that by 12 months. If any healthcare or retirement contributions are taken out of your paystub, you can add them back in.

2. Break apart your pie

Look at the total after-tax income like a pie. Who needs that pie? Your mortgage needs a piece, but so does your retirement account. That is too small of a scale. Instead, think about 3 big categories.

  1. Living expenses – Everything you need to live including Netflix
  2. Savings/Debt Pay-off – This should be your major financial goals and include retirement savings
  3. Fun money – Travel plans, a wedding, your cat’s birthday. The big events go here.

Doing this can take some time. It means looking at your finances and digging through them. If you haven’t calculated your living expenses, there is no better time to start than now.

3. Big picture budgeting

You know your income, how much your living expenses are, if you need to pay off debt, save more, and/or travel to Thailand. You’re now going to big picture budget and set some major financial goals. Here are some examples of what those goals could look like for you:

  • Use 30% of your income to pay off debt
    • Look at what this number is and see how much debt you can pay off in a year
  • Live on half your income
    • Calculate 50% of your income. How much is that over 12 months? Can you reduce expenses to make this possible?
  • Save 20% of your income
    • If you need to ramp up retirement contributions or start an emergency fund setting a savings rate can be very helpful in giving you a specific number to put away every month.

Run the numbers in multiple ways. Live off 60%, travel with 10% and save 30%. Or live off 70% and pay off debt with 30%. It is your money and you can slice that pie any way you want.

4. Break those big numbers apart

The big numbers always set my perspective in place. Saving $10,000 in one year sounds ambitious. But saving $833 per month seems possible. Whatever your goal is, break it down.

Look at the big picture and big numbers, then break them down month to month. This changes everything. It helped me become ambitious with my money. It gave me control over my full salary. So the next year when I looked at Box 1, I knew exactly what I did with all that money. Having your W2 boxes explained can put your overall income in perspective.

w2 boxes explained


Caroline at Costa Rica FIRE February 10, 2020 - 9:45 am

I’m a consultant now, but when I had a W2 job my first 15 years of my career, I always just maxed out retirement contributions. Out of sight, out of mind — if I didn’t have the money I wouldn’t fitter it away. Topping out at least that part of saving ensured I was at least minding my retirement, and it has paid off big time. It seemed like nothing when I started but now I’m late 40’s so we’re looking at almost 30 years of growth. Agree 100% that you need to look at your pay stubs and make sure you’re saving as much as you think into your accounts, that your taxes are being withheld properly (not too much, not too little). I would also look at your benefits policy and make sure you’re taking advantage of every benefit and perk your company offers. I once worked somewhere with deeply discounted movie ticket passes. I took advantage of that from day one, and there were people years into the company who learned about it from me! Read your company benefits plan!

Bethany February 10, 2020 - 10:40 am

So many good tips here! Thank you for sharing.


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