The federal and non-federal wage figures on your W-2 rarely match because each taxing authority writes its own rules about which paycheck deductions and benefits count as taxable pay. Box 1 shows what your employer reported to the IRS as wages subject to federal income tax. Boxes 16 and 18 show the totals your state and any local jurisdiction will tax. Boxes 3 and 5, for Social Security and Medicare, follow a third set of rules. Comparing federal vs. non-federal wages on the same W-2 usually surfaces the same handful of causes: retirement contributions, health accounts, wage caps, and state-level quirks.
What Counts as Federal Wages in Box 1
Box 1 is the pay your employer reported as subject to federal income tax. Federal law defines wages broadly to cover nearly all compensation for work, including salary, hourly pay, bonuses, commissions, and tips.1Office of the Law Revision Counsel. 26 USC 3401 – Definitions Your gross pay doesn’t land in Box 1 unchanged, though. Pre-tax deductions come out first.
Traditional retirement plan contributions are the biggest reducer for most workers. Money you defer into a traditional 401(k) or 403(b) isn’t treated as current federal taxable income, so your employer subtracts it before calculating Box 1.2Internal Revenue Service. 401(k) Plan Overview For 2026, the deferral limit is $24,500, or $32,500 if you’re 50 or older.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026
Health-related deductions also shrink Box 1. Premiums paid through an employer-sponsored cafeteria plan under Section 125 come out pre-tax.4Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans Payroll-deducted contributions to a Health Savings Account do the same. The 2026 HSA limits are $4,400 for individual coverage and $8,750 for family coverage.5Internal Revenue Service. Revenue Procedure 2025-19 Flexible spending account elections for dependent care or medical expenses reduce Box 1 in the same way.
Some non-cash compensation moves the other direction. Group-term life insurance coverage above $50,000 is taxable, so the imputed cost of the excess coverage gets added to Box 1. Personal use of a company car and certain other fringe benefits work similarly unless a specific exclusion applies.6Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits, Publication 15-B
Why Social Security and Medicare Wages Usually Run Higher
Boxes 3 and 5 report wages subject to Social Security and Medicare taxes. These are federal taxes, but the calculation differs from Box 1, which is why the numbers rarely line up. The common surprise: Boxes 3 and 5 are usually higher than Box 1.
The reason is that retirement plan deferrals, while excluded from federal income tax, are still subject to Social Security and Medicare tax. Your 401(k) contributions, 403(b) deferrals, and similar salary reduction amounts all show up in Boxes 3 and 5 even though they’re subtracted from Box 1.7Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 Adoption benefits and certain deferred compensation that vest during the year follow the same pattern.
Box 3 has a ceiling; Box 5 does not. For 2026, Social Security tax applies only to the first $184,500 of wages. You and your employer each pay 6.2% up to that cap.8Social Security Administration. Contribution and Benefit Base If you earn more than $184,500, Box 3 will stop there. Medicare tax has no cap, and an additional 0.9% kicks in once your wages exceed $200,000 ($250,000 if married filing jointly).9Internal Revenue Service. Topic No. 560, Additional Medicare Tax
An example: earn $100,000, defer $10,000 into a 401(k), and your Box 1 might show roughly $90,000 while Boxes 3 and 5 both show $100,000. That gap is normal and doesn’t indicate an error.
State and Local Wages in Boxes 16 and 18
Box 16 reports earnings subject to state income tax. Box 18 does the same for local or municipal taxes. Each jurisdiction decides for itself what counts as taxable, so these totals often differ from Box 1.
Many states start with the federal definition of wages and then make adjustments. The largest divergence involves Health Savings Accounts. The federal government lets you exclude HSA contributions from taxable income, but a handful of states do not recognize that deduction.10U.S. Office of Personnel Management. Health Savings Accounts In those states, Box 16 will be higher than Box 1 by the amount you put into your HSA. Some states also tax retirement plan contributions that the federal government defers, adding another gap.
Nine states have no income tax at all, so workers in those states won’t see anything in Box 16. Workers in cities with local wage taxes may find Box 18 filled in even when their state wages look identical to their federal wages. Local tax bases can be narrower or broader depending on the municipality.
State-specific insurance programs add another layer. Disability insurance and paid family leave programs use their own wage bases and withholding rules, and contributions may be treated differently for state tax purposes than they are federally. If your state wages seem higher than expected, one of these programs is a likely reason.
Common Reasons the Boxes Don’t Match
When you compare several wage totals on the same W-2, the same causes turn up:
- Traditional 401(k), 403(b), and 457(b) contributions reduce Box 1 but stay in Boxes 3, 5, 16, and 18. This is the single most common reason Box 1 is lower than the others.
- HSA contributions reduce Box 1 federally, but states that don’t conform to the federal HSA deduction keep them in Box 16. They’re also excluded from Boxes 3 and 5 when made through a cafeteria plan.7Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
- Group-term life insurance over $50,000: the imputed cost of excess coverage appears in Boxes 1, 3, and 5, but may not appear in Box 16 if the state excludes it.6Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits, Publication 15-B
- Social Security wage cap: earnings above $184,500 stop counting in Box 3. Box 1 and Box 5 keep climbing.8Social Security Administration. Contribution and Benefit Base
- Dependent care assistance up to $7,500 and educational assistance up to $5,250 are excluded from Box 1 but may still appear in other boxes depending on the program.6Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits, Publication 15-B
Box 12 contains letter codes that explain most of these adjustments. Code D shows 401(k) deferrals, Code E shows 403(b) deferrals, Code W shows HSA contributions, and Code C shows the taxable cost of excess group-term life insurance. If the gap between your boxes is confusing, Box 12 usually holds the answer.7Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
If You Work in One State and Live in Another
Your W-2 may show wage entries for both states. Employers generally withhold income tax for the state where you perform the work. Some pairs of states have reciprocity agreements: you file an exemption form with your employer, they withhold only for your home state, and your W-2 reflects wages just in that one state.
Without a reciprocity agreement, you’ll typically file a nonresident return in your work state and a resident return in your home state. Most home states offer a credit for taxes paid to the work state so the same income isn’t taxed twice. You may see the same wages reported in Box 16 for two different states, each with its own state ID and withholding amount. This is normal for cross-border commuters.
Reciprocity agreements have no effect on Box 1. Federal wages stay the same regardless of which state gets the withholding.
Where Each Wage Figure Goes on Your Returns
Each wage figure lands on a different return. Box 1 goes on Form 1040 as your federal wages.11Internal Revenue Service. Form 1040 (2025) Box 16 goes on your state income tax return. If you owe local taxes, Box 18 feeds into your municipal return.
Tax software usually imports the W-2 and routes each box to the correct form. If you file by hand, use the correct box for each return. Entering Box 1 on a state return that expects Box 16 creates a mismatch that can delay processing. The IRS cross-checks your Form 1040 against the W-2 copy your employer files with the Social Security Administration, and state agencies do the same with their copies.7Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 Discrepancies between what you report and what your employer reported can trigger a notice or delay your refund.
What to Do if a Box Looks Wrong
A wrong number in any box can mean you overpay or underpay taxes to the wrong authority. Start by asking your employer to fix it. Employers issue a corrected form called a W-2c, which shows both the original and corrected amounts for the affected boxes.12Internal Revenue Service. About Form W-2 C, Corrected Wage and Tax Statements
If your employer hasn’t corrected the problem by the end of February, the IRS recommends calling 800-829-1040 or visiting a Taxpayer Assistance Center. The IRS will send your employer a letter requesting a corrected W-2 within 10 days. They can also provide Form 4852, a substitute W-2 you can use with pay-stub estimates so you don’t miss the filing deadline.13Internal Revenue Service. If You Don’t Get a W-2 or Your W-2 Is Wrong If a corrected W-2 arrives after you file, you may need to amend the return.