If your state wages and local wages are different on your W-2, it’s usually because state and local governments each write their own rules for what counts as taxable income. A 401(k) contribution your state ignores may be fully taxed by your city. A health premium your state excludes may be added back at the local level. And if you worked in more than one place during the year, Box 18 only reflects the slice of your pay tied to that specific local jurisdiction. These gaps are normal. They rarely mean your employer made a mistake.
Retirement Contributions Are the Most Common Reason
The single biggest driver is how each level of government treats 401(k) and 403(b) contributions. Under federal law, money you defer into a qualified retirement plan isn’t treated as income received in the current year and stays out of your federal taxable wages.1Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees’ Trust Most states follow the same approach, so Box 16 reflects that reduction.
Many local taxing districts don’t. Their earned income tax rules define wages more broadly and add retirement deferrals back into the taxable base. If you contributed $8,000 to your 401(k) during the year, Box 18 will be $8,000 higher than Box 16 whenever your state honors the federal exclusion but your locality doesn’t. This pattern shows up across states with active local income tax systems, and it catches people off guard every filing season.
Cafeteria Plan Benefits and Health Premiums
A cafeteria plan under Section 125 of the Internal Revenue Code lets you pay for health insurance, dental coverage, and flexible spending accounts with pre-tax dollars. The statute keeps those amounts out of gross income as long as the plan doesn’t discriminate in favor of highly compensated employees.2Office of the Law Revision Counsel. 26 USC 125 – Cafeteria Plans Most states honor that exclusion, so Box 16 comes in lower by the amount of your pre-tax benefit elections.
Some local taxing jurisdictions treat those same benefit payments as taxable compensation. When your city or county doesn’t recognize the pre-tax status of your health premiums, the full amount lands back in Box 18. To see exactly what your locality added back, compare the year-to-date totals on your final pay stub against the figures on your W-2. If local wages match your gross pay minus only a few deductions, or none at all, that’s your answer.
Other Fringe Benefits States and Cities Treat Differently
Employer-provided group-term life insurance is another common source of divergence. Federal law includes the cost of coverage above $50,000 in your taxable income.3Office of the Law Revision Counsel. 26 USC 79 – Group-Term Life Insurance Purchased for Employees Most states follow the same rule, so only the imputed cost above the $50,000 threshold shows up in Box 16.4Internal Revenue Service. Group-Term Life Insurance A local municipality might tax the full premium, exempt it entirely, or mirror the federal approach. Each choice produces a different Box 18.
Employer-provided education assistance and certain transportation benefits behave the same way. A state legislature may exempt them while a local district includes them, or the reverse. Depending on which fringe benefits your specific locality taxes, Box 18 can end up higher or lower than Box 16.
Working in More Than One Locality
Geographic allocation is often why Box 18 comes in lower than Box 16. Your state figure reflects everything you earned within that state. Box 18 only captures wages tied to a specific local jurisdiction. If you spent half the year working in one city and half in another, each city gets its own Box 18 entry, and neither one equals your full state wages.
Payroll departments track where the work was performed and split your wages accordingly, usually by days worked or volume of work in each place. If you worked across multiple localities, you may receive a W-2 with two sets of local wage entries, or a second W-2 form entirely.5Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) The sum of your Box 18 figures also won’t match Box 16 if some of your work locations don’t impose a local income tax at all.
Remote Work and the Convenience Rule
Remote work has complicated these allocations. As a general matter, your income is taxed by the jurisdiction where you physically perform the work. But a handful of states apply the “convenience of the employer” rule, which sources your wages to your assigned office location instead of where you actually sit. If your office is in a city with a local income tax and you work from home in a different county, the office city can still claim your wages.
As of 2025, roughly six states enforce some version of this rule, including New York and Pennsylvania, and several cities within those states apply it too. If you’re a remote worker and Box 18 looks unexpectedly high, check whether your employer’s office sits in a jurisdiction that uses this standard.
Reciprocity Agreements Between States
About 16 states and the District of Columbia participate in reciprocity agreements. If you live in one state and commute to work in another that has an agreement with yours, you only owe income tax to your home state, and your employer withholds accordingly. That simplifies your return but can make your W-2 look strange at first glance.
With reciprocity in place, Box 16 can show wages allocated entirely to your home state even though you physically worked somewhere else. Box 18 still reflects whatever the work-location city or county requires, because these agreements operate at the state level and don’t automatically override local tax obligations. If your two states don’t have an agreement, you may need to file returns in both and claim a credit in your home state for taxes paid to the other, which can produce two separate state entries on the same W-2.
When to Suspect an Actual Error
Most gaps between Box 16 and Box 18 are legitimate and require no action beyond filing correctly. If the numbers still look wrong after you’ve accounted for the explanations above, start with your employer’s payroll department. They can walk you through which deductions were included or excluded from each box and confirm the figures against their records.
If payroll agrees there’s an error, they should issue a corrected Form W-2c as soon as the mistake is identified.5Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026) There’s no fixed deadline, but the IRS tells employers to file promptly. If you haven’t received a corrected form by the end of February after contacting your employer, you can call the IRS at 800-829-1040 to open a formal W-2 complaint. The IRS will send your employer a letter requesting the corrected form within ten days.6Internal Revenue Service. W-2 – Additional, Incorrect, Lost, Non-Receipt, Omitted
If the corrected W-2 doesn’t arrive in time to file, you can submit Form 4852 as a substitute and estimate your wages and withholding from your final pay stub.7Internal Revenue Service. About Form 4852, Substitute for Form W-2, Wage and Tax Statement Filing with Form 4852 can delay your refund while the IRS verifies the numbers, so treat it as a last resort. If a corrected W-2 later shows figures that differ from what you reported, you’ll need to amend your return using Form 1040-X.