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W-2 Box-by-Box Guide: Reconciling Wages, Withholding, and Deferrals

August 20, 2026

The Mechanics of W-2 Reconciliation

Year-end payroll requires a precise audit of the Form W-2 to ensure that reported amounts align with Form 941 filings and the general ledger. Discrepancies often lead to IRS Letter CP210 notices. This guide breaks down the reconciliation process by specific box requirements.

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Box 1, 3, and 5: The Wage Base Audit

Reconciling wages is not a one-to-one calculation because different taxes have different exemptions. Use these formulas to verify accuracy:

  • Box 1 (Wages, Tips, Other Compensation): Total Gross Pay minus Pre-tax Deductions (401k, 403b, Section 125 Medical) plus Taxable Fringes (Group Term Life over $50k).
  • Box 3 (Social Security Wages): Total Gross Pay minus Section 125 deductions only. Note: 401(k) contributions are not exempt from Social Security. This box is capped at the annual wage base ($160,200 for 2023; $168,600 for 2024).
  • Box 5 (Medicare Wages): Same calculation as Box 3, but with no wage ceiling.

Box 2, 4, and 6: Tax Withholding Verification

Ensure the withheld amounts reflect the statutory rates and the employee's W-4 elections:

  • Box 2: Federal Income Tax withheld. This must match the sum of Box 2 from all four quarters of Form 941.
  • Box 4: Social Security tax withheld. This should be exactly 6.2% of Box 3.
  • Box 6: Medicare tax withheld. This should be 1.45% of Box 5, plus an additional 0.9% for any wages exceeding $200,000.

Box 12: Deferral and Benefit Codes

Box 12 is critical for tracking retirement contributions and health costs. Common codes include:

  • Code D: 401(k) elective deferrals.
  • Code E: 403(b) elective deferrals.
  • Code W: Employer and employee contributions to a Health Savings Account (HSA).
  • Code DD: Cost of employer-sponsored health coverage (informational only).

State and Local Reconciliation (Boxes 16-20)

State wages in Box 16 may differ from Federal wages in Box 1 depending on state-specific tax laws (e.g., Pennsylvania does not exempt 401k contributions from state tax). Ensure Box 17 (State Income Tax) matches your state unemployment and withholding filings to avoid reconciliation penalties at the state level.

Final Audit Checklist

  1. Cross-reference the W-3 Summary total with the sum of all W-2s.
  2. Verify that Box 12 Code D amounts do not exceed the annual IRS elective deferral limits.
  3. Confirm that Box 13 'Retirement Plan' is checked if the employee was eligible for a 401(k) or SEP during the year.
  4. Validate Social Security Numbers against payroll records to prevent 'No Match' letters.