Bookkeeping · Payroll & Compliance · Brief · Intro level
Why the W-2 doesn't match the final paystub
The W-2's Box 1 is not gross pay — pretax deductions pull the boxes apart in predictable ways. How to reconcile them and explain the difference to an employee.
Every February, an employee brings in a final paystub and a W-2 and asks why the numbers disagree. They should disagree. The paystub's year-to-date gross is pay before deductions; W-2 Box 1 is pay as taxed — gross minus the pretax items. The two are related by simple arithmetic, and being able to walk that arithmetic is the whole skill.
The arithmetic
Take an employee with $60,000 gross, $4,000 of traditional 401(k) deferrals, and $2,000 of Section 125 health premiums:
How one gross figure becomes three different W-2 wage boxes:
| Figure | Amount | Why |
|---|---|---|
| YTD gross (final paystub) | $60,000 | Pay before anything comes out |
| Box 1 — federal taxable wages | $54,000 | Less 401(k) ($4,000) and cafeteria premiums ($2,000) |
| Box 3 — Social Security wages | $58,000 | Less cafeteria premiums only; 401(k) does not reduce it; capped at the annual wage base |
| Box 5 — Medicare wages | $58,000 | Same as Box 3, but with no cap |
Other movers, less common but predictable: Roth 401(k) deferrals reduce nothing (they appear in Box 12 only); HSA and FSA contributions through a cafeteria plan reduce all three boxes; taxable fringe benefits like personal use of a company car increase the boxes above cash gross (see /bookkeeping/payroll-compliance/fringe-benefits-bookkeeping); and for an S corp more-than-2% shareholder, company-paid health premiums are added to Box 1 but not Boxes 3 and 5 (/bookkeeping/payroll-compliance/owner-payroll-scorp).
Box 2 confuses separately: it is simply the income tax withheld, an estimate driven by the employee's Form W-4 — not a wage figure at all.
Explaining it to the employee
Keep it to three sentences: "Your paystub shows everything you earned. The W-2 shows what's taxable, which is smaller because your 401(k) and health premiums came out before tax — that's the benefit working as designed. The boxes differ from each other because retirement deferrals escape income tax but not Social Security and Medicare."
Reconciling before W-2s go out
The February conversation is easiest to have in December. Before finalizing W-2s:
- Recompute each wage box from YTD gross and the deduction registers, per the table above; the mechanics live in Publication 15.
- Tie total Box 1 and withholding across all W-2s to the four quarterly 941s — the IRS matches them; see /bookkeeping/payroll-compliance/form-941-basics.
- If a box doesn't recompute, find the miscoded deduction now — a fix before filing is an edit; after filing it is a W-2c.
A W-2 that recomputes cleanly from the final paystub is the sign of a payroll year coded correctly. One that doesn't is your earliest, cheapest audit.
Frequently asked questions
- Why is W-2 Box 1 less than my gross pay on the final paystub?
- Box 1 reports federally taxable wages, which is gross pay minus pretax deductions such as traditional 401(k) deferrals, Section 125 health premiums, FSA, and HSA contributions. The final paystub's year-to-date gross is pay before any of those come out, so Box 1 is almost always smaller.
- Why are W-2 Boxes 1, 3, and 5 different from each other?
- Different taxes exempt different deductions. Traditional 401(k) deferrals reduce Box 1 (income tax wages) but not Boxes 3 and 5 (Social Security and Medicare wages). Cafeteria-plan health premiums reduce all three. Box 3 is also capped at the annual Social Security wage base, while Box 5 has no cap.
- What should match between the final paystub and the W-2?
- Year-to-date gross minus each pretax deduction should recompute every wage box: gross less 401(k) and cafeteria items equals Box 1; gross less cafeteria items (capped at the wage base) equals Box 3; the same uncapped equals Box 5. If the recomputation doesn't tie, something was miscoded during the year.