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What’s in the Box? Decoding a Federal Employee’s W2

Tyler Weerden

First Things First – W2 vs. 1099-R

If you collected a paycheck as an active employee and also received your retirement “annuity”/pension in 2024, you’ll receive both a W2 and a 1099. The W2 will include your earned income as an active employee and your annual leave lump-sum payout. The money you received in your retiree annuity check (to include the Retiree Annuity Supplement) will be reported on your 1099-R.

 

For the 1099-R, you’ll notice in Box 1, “Gross Distribution” is slightly higher than Box 2a, “Taxable Amount”. Why is this? Remember, a portion of your pension check is a return of contributions that were already taxed. When you get your pension check, a portion is a return of contributions, which is why the taxable amount is slightly smaller. Retired Public Safety Officers, don’t forget you can deduct post-tax insurance premiums you paid up to $3,000 from the amount shown in 1099-R Box 2a. If you paid less than $3,000, you can deduct that smaller amount. Post-tax premiums paid via deduction from your pension check, or paid directly from your bank account to the insurance company qualify. This will reduce the taxable amount of pension dollars that you report on line 5b of your Form 1040. On the dotted line next to 5b, write in “PSO”.

 

The 1099-R you get for your pension will not reflect amounts you withdrew from your Thrift Savings Plan (TSP) or IRA. Those custodians will send you a 1099-R for those accounts.

 

Now, for the W2.

 

Box 1 – Wages, Tips, Other Compensation

Box 1 shows taxable wages and other compensation like bonuses, awards, and prizes. This includes law enforcement availability pay (LEAP), locality pay, Sunday differential, night differential, holiday pay, and overtime. "Incentive allowances” such as post/hardship differential, danger pay, and difficult-to-staff incentive differential are included in gross taxable income.

 

It’s important to know that Box 1 is not your taxable income, it’s just a starting point. When you work through your taxes, you may have other adjustments to income, additional income, credits, and deductions (standard or itemized) to arrive at your actual taxable income.

 

What is Not Included in Box 1?

 

Traditional (pre-tax) contributions you made to your TSP. Remember, contributing towards your traditional TSP, or other employer sponsored retirement plan (401(k), 457(b), 403(b)) will reduce your taxable wages shown in Box 1.

 

Pre-tax healthcare premiums are not included in Box 1. The premiums you pay for FEHB, dental, vision, and HSA/FSA contributions are all excluded from your taxable income.

 

Cost-of-Living Allowance/ Post Allowance – Don’t confuse this with the Cost-of-Living Adjustment that retirees are paid, this is different. The COL-Allowances that are not considered taxable income are those that reimburse employees, generally due to their foreign assignment. This means you would subtract line items like post allowance and separate maintenance allowance. Department of State Standardized Regulations (DSSR) 054 details the taxation of allowances.

 

If you look at the “Gross Pay” on your last paycheck for the year, and then subtract the pre-tax traditional TSP contributions, pre-tax healthcare premiums, and non-taxable allowances, you should arrive at Box 1 of your W2.

 

For new hires who joined the government at the end of 2024 and didn’t have any other earned income, the amount shown in Box 1 is the limit for IRA contributions, whether making Roth, traditional, or doing a combination of both. So, if you collected one paycheck and your Box 1 is $3,000, that’s the maximum you can contribute, even though the IRS limit is $7,000 ($8,000 for those 50+). Good news! You can still make an IRA contribution for tax-year 2024 up until the tax filing deadline (April 15, 2025). Make sure you understand the Roth IRA income limits, the traditional IRA deductibility rules, and your full tax picture before making a decision on which contribution to make.


Box 2 – Federal Income Tax Withheld

Box 2 shows the federal income tax withheld from your paychecks throughout the year. This may not be your actual tax liability, it’s just what was withheld based on the information you provided for withholding. Your actual tax liability may be more (owe) or less (refund). If you end up owing money at tax time, and this is your sole source of income, you may need to adjust your withholding. If you have other sources of income that aren’t having taxes withheld, and you’re also not making proper quarterly estimated tax payments, that could be the culprit behind you owing.

 

Whatever you do, do not simply take the commonly repeated advice and increase your Traditional (pre-tax) TSP contributions so that you don’t owe anything at tax time next year. While this may prevent you from owing, it’s not an actual solution. Increasing your traditional TSP to avoid owing tax is the wrong band-aid to apply in this situation. Someone in the 12% bracket could owe tax after completing their return for many reasons; this does not signal an automatic shift to traditional contributions.

 

Instead, figure out what’s causing you to owe; it could be caused by a simple withholding issue. Just because you owe money at tax time does not automatically mean you should be making pre-tax TSP contributions. The only thing this indicates is that you didn’t pay your full tax liability throughout the year. Consult with your accountant or financial planner for more guidance.

 

Box 3 – Social Security Wages

Box 3 shows the total amount of income that was subject to the employee portion of Social Security tax (6.2%). There is an annual ceiling on this amount. For 2024, the maximum Social Security “wage base” could not exceed $168,600. So, if you made more than $168,600 in 2024, you’ll see that higher amount in Box 1, but Box 3 will show a maximum of $168,600 for 2024.

 

Box 4 – Social Security Tax Withheld

Following what we just covered in Box 3, Box 4 shows the total Social Security tax that you paid. We know that the maximum income subject to Social Security tax in 2024 was $168,600, and the rate is 6.2%. Therefore, the maximum amount of Social Security tax you could have paid in 2024 is $10,453.20 ($168,600 x 6.2%). NOTE: If you had more than one W2 employer in 2024, you paid Social Security tax to both employers. You may have paid more than the $10,453.20 maximum. Not a huge deal. When you file your taxes, go to Schedule 3 (Additional Credits and Payments), Part 2 (Other Payments and Refundable Credits) and enter the excess amount on Line 11 (Excess Social Security).


Box 5 – Medicare Wages & Tips

Unlike Social Security tax, there is no “wage base”/ceiling on how much of your income is subject to the Medicare tax (1.45%). Additionally, while traditional (pre-tax) TSP contributions reduce your federal tax, they do not reduce your FICA (Federal Insurance Contributions Act) tax, which consists of Social Security and Medicare (7.65% total). FICA tax will be applied to your income after deducting the pre-tax healthcare related expenses that come out of your check.

 

So, your Medicare wages in Box 5 could be higher than your wages in Box 1, even if you made traditional TSP contributions. If you made traditional TSP contributions, Box 5 will most likely equal Box 1 plus your traditional TSP contributions. Looking at it the other way, Box 5 will most likely equal your YTD “Gross Pay” from your last paycheck in 2024 minus the pre-tax healthcare related expenses you paid (FEHB, dental, vision, HSA/FSA), minus the non-taxable allowances/incentives (e.g., separate maintenance allowance).

 

Box 6 – Medicare Tax Withheld

Box 6 is self-explanatory, however, you could actually owe more than the standard 1.45% for Medicare tax. In order to help fund the Affordable Care Act, an additional Medicare tax was adopted. Single filers with Medicare wages that exceed $200,000, and those who file Married Filing Joint (MFJ) with over $250,000 in Medicare wages will have to pay an additional 0.9% in Medicare tax.

 

Box 12 – Additional Information from Your Employer

Code D: Contributions to traditional TSP (not included in box 1, but included in box 3 and 5).

 

Code AA: Contributions to Roth TSP (included in Box 1, 3, and 5).

 

Codes D + AA: If you contributed to both traditional TSP and Roth TSP, and maxed out your contributions for the year, D + AA should equal the maximum amount that you were allowed to contribute. This does not include matching contributions. The maximum contribution amount you are allowed to make is known as the “elective deferral limit” (IRC 402(g)).

 

Code DD: This is the cost both you and the federal government paid for your employer-sponsored healthcare coverage. This amount is not taxable.

 

Code W: Contributions to a Health Savings Account (HSA). When I log into Employee Express and look at my W2 preview, I have Code W in Box 12. When I click “View PDF”, that version of the form does not show Code W. While odd, this doesn’t really matter. HSA contributions are pre-tax, so they are already excluded from Boxes 1, 3, and 5. The amount shown for Code W is what I personally contributed to my HSA via payroll deduction, excluding the premium-pass through (explained next).

 

With some HSA-eligible High-Deductible Health Plans (HDHP) like GEHA, you receive a monthly deposit into your HSA that’s called a “premium pass-through”. A portion of the premium paid is given back to you, via a deposit into your HSA, which can then be invested or spent on eligible healthcare expenses. GEHA HDHP self-only plans receive $1,000 annual premium pass-through, while family plans receive $2,000.

 

This premium pass-through amount has already been removed from your income (part of Code DD in Box 12), so you do not get an additional deduction for this. Line 9 of IRS Form 8889 should include both the amount you contributed to your HSA via payroll deduction and the premium pass-through amount.

 

If you made contributions to your HSA not via payroll deduction, but instead sent regular already-taxed money from your bank account to your HSA, you can still reduce your taxable income (except for CA & NJ state income) by reporting these non-payroll contributions on Line 2 of Form 8889. These non-payroll contributions will not reduce your FICA tax. This is why it’s better to contribute to your HSA via payroll deduction. In this scenario, where you’re reporting non-payroll HSA contributions on Line 2 of Form 8889, you would report the premium pass-through amount on Line 9 of Form 8889. Again, you do not get to double-dip and deduct the premium pass-through since it’s already pre-tax.

 

For example, let’s say you had GEHA HDHP self-only coverage and maxed out your HSA in 2024 (maximum contribution of $4,150). We know $1,000 worth of that $4,150 came from the premium pass-through and we’ll say $3,150 came from your bank account, not via payroll. You would enter $3,150 on Line 2 and $1,000 on Line 9. If you work through the form, you’ll see that the allowable HSA deduction in this example is $3,150. Why? $1,000 premium pass-through was already pre-tax.

 

Healthcare FSA contributions are pre-tax and therefore will reduce the amount in Box 1. Dependent Care FSA amounts are also pre-tax and are noted in Box 10.

 

Box 13 – Check Boxes / Retirement Plan

This box is important for federal employees because it indicates that they were an “active participant” in a retirement plan. Why does this matter? Being an active participant in a retirement plan is one part of the two-prong test to determine how much (if any) of a traditional IRA contribution is deductible. The test for deductibility depends on your income, and whether you and/or your spouse were covered by a retirement plan.

 

Box 14 – Other/ Additional Information from Your Employer

You can think of this as a miscellaneous reporting box. You might see “FEHBA” in Box 14, which should equal the total amount you paid in FEHB premiums. You may also see “DENTL”, which should equal the total amount you paid for dental insurance. These two examples are pre-tax.


About the Author

Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm. In addition to being a financial planner, Tyler is a full-time federal agent with 15 years of law enforcement experience on the local, state, and federal level. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), Health Savings Accounts (HSAs), and invests in rental real estate. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE).

 

Disclaimer

Layered Financial is a Registered Investment Adviser registered in the Commonwealth of Virginia and State of Texas. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Nothing in this article should be seen as a recommendation or advertisement. Layered Financial and its Investment Advisor Representatives have no third-party affiliations and do not receive any commissions, fees, direct compensation, indirect compensation, or any benefit from any outside individuals or companies. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments, types of investments, products, or companies are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment, solicit the business, or use that product. The author of this publication may hold positions in investments or types of investments mentioned in articles. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances. 

 

© 2025 Tyler Weerden. All rights reserved. This article may not be reproduced without express written consent from Tyler Weerden.

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