Final paystubs versus W-2s
Year end is fast approaching, which means it is almost time for employees to receive their final paystubs of the year. In addition to final paystubs, employers must provide a W-2 to each employee by January 31st. But, are final paystubs and W-2s the same? Let’s take a look at final paystubs versus W2s.
What is a final paystub?
A final paystub is the last check that an employee will receive for the year. The final paystub will show the total, or gross, earnings that an employee received. In addition, employees can see the following on their final paystubs:
- total income taxes paid for the year
- total FICA taxes paid for the year
- the total deductions taken for things such as retirement contributions, health insurance, etc
- any employer contributions towards retirement and health, dental, and vision insurance, etc
- total employee contributions to State run programs like Paid Family Medical Leave
What is a W-2?
Form W-2 is an IRS form that summarizes an employee’s taxable earnings received in a calendar year. Unlike a final paystub, the Form W-2 is a document that is required to be given to employees by the IRS. Once an employee elects their preferred withholdings like healthcare and retirement contributions, the employer must send a receipt of that information to the IRS for reporting purposes. W-2’s must be provided to all employees no later than January 31st each year.
How does a final paystub and W-2 differ?
There are a number of ways a final paystub differs from a W-2. A final paystub will show the total income earned by the employee, while the W-2 will only show the employee’s taxable wages. Final wages and taxable wages may not match because of:
1. Non-Taxable Income Items
There are times when an employee will receive an expense reimbursement that is considered non-taxable. Generally, any reimbursement for items that are considered “business necessities” are non-taxable income to an employee. Items such as:
- Office Supplies
- Education & Training
- Mileage & Tolls
- Business Meals
- Business Travel
- Miscellaneous Business Expenses
- Required Tools & Uniforms
- Student Loan/Educational Reimbursement (under a Section 127 plan – up to $5250 per year)
- Parking Stipends (up to $280/month under a qualified plan)
- Cell Phone Stipend (for business related use)
While these are non-taxable items and do not show up on the Form W-2, they will be reported on in the employee’s gross wages on their final paystub.
2. Company Health Insurance
Health insurance deductions that are made on a pre-tax basis are another reason that final paystubs differ from W-2s. With a Section 125 plan in place, company health insurance plans can qualify for pre-tax deductions. The taxable wages on the W-2 will be lowered by the amount of the employee’s pre-tax health insurance deduction.
For example, John earns $50,000 per year. John contributes $5,000 to a pre-tax health insurance plan. John’s final paystub will show $50,000 in earnings, but his W2 will show $45,000 in taxable wages.
3. Company Retirement Plan
As with a company health insurance plan, certain company-sponsored retirement plans, like 401(k)s or SIMPLE IRAs, will reduce an employee’s taxable income. The taxable wages on the Form W2 will be lower than the gross wages on the final paystub.
For example, John earns $50,000 per year and contributes $10,000 towards his 401(k). John’s final paystub would still report the $50,000 in gross earnings, but his W2 would report $40,000 in taxable wages.
Conclusion
While both the final paystub and the W-2 provide important information about an employee’s earnings, they serve different purposes and report different details. A final paystub gives a comprehensive view of total earnings and deductions for the year, including non-taxable income and pre-tax contributions. In contrast, the W-2 focuses solely on reporting taxable wages and withholdings required by the IRS. Understanding the differences between these two documents helps employees verify their income information, ensure accurate tax filing, and avoid confusion during tax season. As year-end approaches, employers should be prepared to distribute both final paystubs and W-2 forms on time to keep their teams informed and compliant.