What Are Taxable Wages on a W-2 and Why Boxes Differ

The taxable wages on a W-2 are the parts of your pay that each federal tax applies to: Box 1 shows wages subject to federal income tax, Box 3 shows wages subject to Social Security tax, and Box 5 shows wages subject to Medicare tax. Those three numbers are almost never identical. Each tax recognizes a different set of pre-tax deductions, and Social Security stops taxing wages once you hit an annual cap, so the same paycheck produces three different totals on the same form.

What Counts as Wages Before Any Deductions

Federal law defines wages broadly. Virtually all compensation your employer gives you for work counts, whether paid in cash or another form.¹ Salary, hourly pay, bonuses, commissions, and paid vacation are all wages. Tips you receive on the job are wages too, and you must report them to your employer so they end up on your W-2.²

Non-cash compensation counts as well. If your employer lets you use a company car for personal driving, the value of that personal use is a taxable fringe benefit that lands on your W-2.³ Employer-provided group-term life insurance is tax-free up to $50,000 of coverage, but the imputed cost of anything above that threshold gets added to Boxes 1, 3, and 5.⁴ This one catches people off guard because no extra cash hits your bank account, yet your W-2 wages are higher than your paychecks suggest.

Back pay from a legal settlement and severance payments are also taxable wages, subject to the same withholding as a regular paycheck.⁵

Box 1: Federal Taxable Wages

Box 1 starts with your gross pay and subtracts the pre-tax deductions your employer processes. Traditional (pre-tax) contributions to a 401(k) or 403(b) come out before federal income tax is calculated, so they reduce Box 1.⁶ For 2026, you can defer up to $24,500 into a 401(k) or 403(b). Workers age 50 and older can add $8,000 in catch-up contributions, and a “super catch-up” lets those aged 60 through 63 add $11,250 instead.⁷ Every dollar you defer through these plans drops Box 1 by the same amount.

Roth 401(k) and Roth 403(b) contributions work differently. Because Roth contributions are made with after-tax dollars, they stay in Box 1.⁶ If you contribute to a Roth account and wonder why your three W-2 boxes look almost identical, that’s why.

Other pre-tax items that reduce Box 1 include premiums for employer-sponsored health insurance paid through a cafeteria plan, Health Savings Account contributions routed through payroll, health care FSA contributions, and dependent care FSA contributions. For 2026, the HSA limits are $4,400 for self-only coverage and $8,750 for family coverage.⁸ The health care FSA limit is $3,400, and the dependent care FSA limit rose to $7,500 per household ($3,750 if married filing separately). Qualified transportation and parking benefits can be excluded up to $340 per month.⁹

Taxable fringe benefits get added back in. The imputed cost of group-term life insurance over $50,000, personal use of a company vehicle, and any other benefit the law doesn’t specifically exclude all raise Box 1.³ Box 2, right next to it, shows how much federal income tax your employer actually withheld against Box 1 wages.

Box 3: Social Security Wages

Box 3 reports how much of your pay was subject to Social Security tax. The employee rate is 6.2%, matched by your employer.¹⁰ Two features make it look different from Box 1.

First, pre-tax retirement contributions like traditional 401(k) deferrals do not reduce Box 3. Social Security taxes apply to those deferrals even though federal income tax does not, so your employer leaves them in.⁶ That alone makes Box 3 larger than Box 1 for anyone contributing to a traditional retirement plan. Health insurance premiums under a cafeteria plan and HSA contributions through payroll are the notable exceptions: they lower Box 3 as well.

Second, Box 3 has a ceiling. For 2026, the Social Security wage base is $184,500.¹¹ If you earned more than that, Box 3 stops at $184,500 regardless of total pay. The cap is set by statute and adjusts annually.¹² For high earners, Box 3 can actually be smaller than Box 1.

Box 5: Medicare Wages

Box 5 reports wages subject to Medicare tax at 1.45%, again matched by your employer. Like Box 3, it includes pre-tax retirement deferrals. Unlike Box 3, there is no wage cap. Every dollar of Medicare-taxable compensation goes into Box 5 no matter how much you earn.¹⁰

For most workers, Box 5 and Box 3 are identical. They separate only when your earnings cross the $184,500 Social Security wage base. At that point Box 3 freezes while Box 5 keeps climbing. Once your wages pass $200,000 in a calendar year, your employer must also withhold an extra 0.9% Additional Medicare Tax on the wages above that threshold.¹³

A Worked Example

Say you earn $100,000 in gross pay for 2026, contribute $10,000 to a traditional 401(k), and pay $2,400 in health insurance premiums through a cafeteria plan.

Box 1: $100,000 minus $10,000 (401(k)) minus $2,400 (health premiums) = $87,600.
Box 3: $100,000 minus $2,400 (health premiums) = $97,600. The 401(k) deferral stays in because Social Security tax still applies.
Box 5: $97,600, the same as Box 3 at this income level.

Now change the gross pay to $250,000 with the same deductions. Box 1 would be $237,600. Box 3 would cap at $184,500, the 2026 wage base, even though your Social Security-taxable compensation is higher.¹¹ Box 5 would show the full $247,600 with no cap. In that scenario Box 5 is the largest number on the form, Box 1 sits in the middle, and Box 3 is the smallest.

Box 12 Codes That Explain the Gaps

Box 12 uses letter codes to break out specific items that affect how the three wage boxes were calculated. Some of the ones that most often account for the differences:

Code D: traditional 401(k) deferrals. Excluded from Box 1, included in Boxes 3 and 5.
Code E: traditional 403(b) deferrals. Same treatment as Code D.
Code AA: Roth 401(k) contributions. Included in all three boxes because they’re after-tax.
Code W: employer HSA contributions, including your payroll contributions routed through a cafeteria plan. Not included in Boxes 1, 3, or 5.
Code C: taxable cost of group-term life insurance over $50,000. Added into Boxes 1, 3, and 5.
Code DD: total cost of employer-sponsored health coverage. Informational only; does not affect any taxable wage box.

If Box 1 looks higher or lower than you expected, check the codes first. A Code C entry, for instance, explains why your taxable wages exceed your gross salary.

If the Numbers on Your W-2 Look Wrong

Compare your final pay stub to the W-2. If the figures don’t line up, start with your employer’s payroll department. They can issue a corrected Form W-2c. Employers are required to furnish your W-2 by February 1 of the following year (February 1, 2027 for tax year 2026).¹⁴

If your employer won’t cooperate and you still don’t have a corrected form by the end of February, call the IRS at 800-829-1040. The IRS will contact your employer and send you Form 4852, a substitute W-2. You estimate your wages and withholding from your pay stubs and file using those figures.¹⁵ If a corrected W-2 arrives later with different numbers, amend your return using Form 1040-X.

1
Office of the Law Revision Counsel. 26 USC 3401 – Definitions
2
Internal Revenue Service. Topic No 761, Tips – Withholding and Reporting
3
Internal Revenue Service. Publication 15-B (2026), Employers Tax Guide to Fringe Benefits
4
Internal Revenue Service. Group-Term Life Insurance
5
Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income – Section: Miscellaneous Compensation
6
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions
7
Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
8
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Internal Revenue Service. Understanding Employment Taxes
11
Social Security Administration. Social Security Tax Limits on Your Earnings
12
Office of the Law Revision Counsel. 26 USC 3121 – Definitions
13
Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
14
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
15
Internal Revenue Service. W-2 – Additional, Incorrect, Lost, Non-Receipt, Omitted