What Moves Box 1 on Your W-2

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Box 1 of the W-2 is not what you were paid. It is what you were paid, minus everything the law lets your employer take out before tax, plus everything the law says is taxable even though it never showed up in your check. The subtractions are the familiar ones: the 401(k), the health premiums, the flexible spending account, the HSA. The additions are the ones that surprise people in January: the life insurance over $50,000, the personal miles on the company car, the health insurance an S corporation pays for its owner, the bonus that was “grossed up.” Boxes 3 and 5, the Social Security and Medicare wages, follow different rules, which is why the three numbers rarely match.

This page is the list, in both directions, with the 2026 limits, and three calculators: one that builds Box 1 from your pay stub, one that does the employer’s gross-up, and one for the taxable cost of group life insurance.

Three Boxes, Three Answers

The IRS calls it: wages under Sections 3401, 3121 and 3121(a)(2)

Box 1 is federal income tax wages: gross pay, less the deductions that are excluded from income tax, plus the taxable benefits. It is the number that goes on line 1a of the 1040. Box 3 is Social Security wages: the same gross pay, less only the deductions that are excluded from Social Security tax, capped at the wage base ($184,500 for 2026). Box 5 is Medicare wages: the same as Box 3 with no cap. Box 16 is Colorado wages, which equals Box 1 for almost everyone.

The reason they differ is one rule: retirement deferrals come out of Box 1 but not Boxes 3 and 5; cafeteria-plan deductions come out of all three. So a $90,000 employee who defers $5,800 to a 401(k) and pays $5,150 of health premiums and FSA through the cafeteria plan, and has $650 of taxable life insurance, shows Box 1 $79,700, Box 3 $85,500, Box 5 $85,500 — and the pay stub’s “gross” of $90,000 appears nowhere on the form.

Item	Box 1 (income tax)	Box 3 (Social Security)	Box 5 (Medicare)	Where it shows
401(k), 403(b), 457(b), SIMPLE deferrals (pre-tax)	Out	In	In	Box 12 code D, E, G, S; Box 13 retirement plan checked
Roth 401(k) deferrals	In	In	In	Box 12 code AA, BB
Health, dental, vision premiums through a §125 plan	Out	Out	Out	Box 14, sometimes; Box 12 code DD shows total cost of coverage
Health FSA	Out	Out	Out	Usually nowhere
Dependent care FSA	Out	Out	Out	Box 10
HSA contributions through payroll, and the employer’s	Out	Out	Out	Box 12 code W (both)
Commuter benefits (transit, parking)	Out	Out	Out	Box 14, sometimes
Group life insurance over $50,000	In	In	In	Box 12 code C
Personal use of a company vehicle	In	In	In	Box 14, sometimes
Health insurance paid for a 2%+ S corporation shareholder	In	Out	Out	Box 14
Bonuses, taxable awards, gross-ups, taxable moving reimbursements	In	In	In	In the wages
Nonqualified deferred compensation when it vests or is paid	In when paid	In when vested	In when vested	Box 11; Box 12 code Y
Nonstatutory stock option exercise; restricted stock vesting	In	In	In	Box 12 code V (options)

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What Comes Out

The IRS calls it: elective deferrals (§402(g)), cafeteria plans (§125), and the fringe-benefit exclusions

Every dollar in this table is a dollar you earned and did not pay income tax on. The cafeteria-plan items also escape Social Security and Medicare tax, which at 7.65% is often the bigger saving for a middle-income household.

Deduction	2026 limit	2025	Saves income tax	Saves FICA (7.65%)
401(k) / 403(b) / 457(b) elective deferral	$24,500	$23,500	Yes	No
Catch-up, age 50 and over	$8,000	$7,500	Yes	No
Catch-up, ages 60–63	$11,250	$11,250	Yes	No
SIMPLE IRA deferral (catch-up $4,000; ages 60–63 $5,250)	$17,000	$16,500	Yes	No
Health, dental and vision premiums (employee share) through §125	No limit	—	Yes	Yes
Health FSA	$3,400	$3,300	Yes	Yes
HSA, self-only / family (catch-up $1,000 at 55)	$4,400 / $8,750	$4,300 / $8,550	Yes	Yes, through payroll
Dependent care FSA (married filing separately $3,750)	$7,500	$5,000	Yes	Yes
Transit pass and parking, each, per month	$340	$325	Yes	Yes
Adoption assistance	$17,670	$17,280	Yes	No
Educational assistance (§127), including student loan payments	$5,250	$5,250	Yes	Yes

Three things people get wrong. The HSA saves FICA only if the contribution runs through the employer’s payroll; a deposit you make yourself is deducted on the 1040 (Schedule 1) and gets the income tax back but not the 7.65%. The dependent care FSA jumped to $7,500 for 2026 under the 2025 tax law, and anything over the limit shows up in Box 10 and gets added back on Form 2441. And a Roth 401(k) contribution reduces nothing on the W-2; it is after-tax by design and is reported in Box 12 (code AA) so the IRS knows it was made.

What the exclusion is worth: a $5,000 health FSA election for someone in the 22% bracket saves $1,100 of federal tax, $220 of Colorado tax and $383 of FICA — $1,703, or 34% of the money. The same $5,000 put in a 401(k) saves $1,320, because the FICA is still paid. Both beat the same dollars taken home and spent.

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What Goes In

The IRS calls it: taxable fringe benefits, Publication 15-B

Anything of value an employer provides is wages unless a specific section of the Code excludes it. The common additions, in rough order of how often they show up in Lone Tree:

• Group-term life insurance over $50,000 (§79): the cost of coverage above $50,000, from the IRS age table, less anything the employee paid after tax. Box 12 code C, and it is in Boxes 1, 3 and 5. A $200,000 policy on a 52-year-old adds $414 a year. Detail and a calculator below.
• Personal use of a company vehicle (§61, Reg. §1.61-21): commuting and personal miles valued by the cents-per-mile rule (72.5 cents for 2026, for vehicles worth up to $61,700 when first provided), the annual lease value table, or $1.50 per one-way commute for a vehicle the employee must drive home. The employer may withhold income tax on it or not (with notice), but Social Security and Medicare are always withheld.
• S corporation health insurance for a 2%-or-more shareholder (§1372, Notice 2008-1): the premiums the corporation paid are in Box 1 and Box 16, not in Boxes 3 and 5, shown in Box 14. The shareholder then deducts them on Schedule 1 as self-employed health insurance. If the premiums are not on the W-2, the deduction is lost; this is the item most often missing from an S corporation owner’s W-2. S corporations has the rest.
• Bonuses, awards and prizes: cash and gift cards of any amount; merchandise awards over the de minimis level; achievement awards above $1,600 ($400 for a non-qualified plan). Length-of-service and safety awards of tangible property within those limits are excluded; a Visa card never is.
• Gross-ups: the extra wages an employer adds so a benefit arrives net of tax. The gross-up is itself wages. Below.
• Moving expenses: all employer-paid or reimbursed moving costs are taxable wages (2018 through at least 2028 under the 2025 law, except for active-duty military on orders).
• Nonqualified deferred compensation: in Boxes 3 and 5 when it vests (Box 12 code Y for the deferral), in Box 1 when paid (Box 11); a §409A failure puts it all in Box 1 at once with a 20% penalty (code Z).
• Stock: the spread on a nonstatutory option exercise (code V), the value of restricted stock when it vests (or at grant with an §83(b) election), the discount on an ESPP disqualifying disposition, RSU vesting — all wages, all in the three boxes, and the brokerage 1099-B will show the sale with a basis that does not include it unless corrected.
• Imputed income for domestic partner coverage: the employer’s cost of health coverage for a partner who is not a tax dependent is wages (a spouse’s coverage is not).
• Excess reimbursements: expense allowances with no accounting (a flat $500 a month “car allowance”), per diems over the federal rate, mileage over the standard rate, anything paid under a non-accountable plan.
• Third-party sick pay from an insurer, taxable when the employer paid the premiums (Box 13 checked, often a separate W-2).

Excluded, and therefore not in any box, when the rules are followed: health coverage itself (code DD is information only), de minimis items (the holiday ham, occasional meals, the office coffee), working-condition fringes (the laptop, the professional dues), no-additional-cost services and qualified employee discounts, on-premises athletic facilities, accountable-plan reimbursements, employer retirement contributions and matches, up to $5,250 of educational assistance, and employer-provided cell phones used mainly for business.

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Calculator: Build Your Box 1

The IRS calls it: Form W-2, Boxes 1, 3, 5 and 16

Enter the year’s gross pay from the last pay stub and the year-to-date deductions and taxable benefits. The calculator produces the three wage boxes and an estimate of what the pre-tax deductions saved, using the marginal rate you pick and Colorado’s 4.40%.

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The Gross-Up

The IRS calls it: wages; the employer calls it making the employee whole

An employer that gives an employee a $500 holiday bonus and wants the employee to net $500 has a problem: the $500 is wages, so withholding comes out of it. The fix is to pay more than $500 — enough that after withholding on the whole amount, $500 is left. But the extra is also wages and also taxed, and the tax on that is also wages, and so on. The series converges, and the formula is simple: gross = net ÷ (1 − the combined withholding rate). The same arithmetic applies to any benefit the employer wants to deliver net of tax — a taxable moving reimbursement, a tax-equalization payment, a prize, an executive’s club dues.

The worksheet: (1) the net amount the employee is to receive; (2) 1.00; (3a) the FICA rate as a decimal (0.0765, or 0.0145 if the employee is over the Social Security wage base); (3b) the federal withholding rate (the 22% supplemental rate for a bonus paid separately, or the employee’s regular percentage); (3c) the state rate (Colorado 0.044); (3d) the sum; (4) line 2 minus line 3d; (5) line 1 divided by line 4 = the gross wage. Employers may use the formula only when federal withholding is figured by the percentage method or the supplemental flat rate.

The example from the worksheet: a $500 net bonus with 7.65% FICA, 15% federal and 5% state withholding: 1 − 0.2765 = 0.7235; $500 ÷ 0.7235 = $691.09 gross, of which $52.87 is FICA, $103.67 federal, $34.55 state, and $500.00 reaches the employee. The $691.09 is in Boxes 1, 3 and 5, and the employee’s actual tax on it in April may be more or less than the withholding; the gross-up only guarantees the net on payday.

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Group Life Over $50,000

The IRS calls it: Section 79 and Table I (Reg. §1.79-3)

Employer-paid group-term life insurance is tax-free up to $50,000 of coverage. Above that, the IRS’s cost of the excess coverage — not the employer’s actual premium — is wages, computed monthly from the age table and reduced by anything the employee paid toward the policy with after-tax dollars. It is in Boxes 1, 3 and 5 and shown in Box 12 with code C. For a retiree whose former employer keeps the coverage, the same amount shows up on a W-2 with no cash to withhold from, which is how a retired teacher ends up owing Social Security tax.

Age on December 31	Monthly cost per $1,000 of coverage	Age on December 31	Monthly cost per $1,000
Under 25	$0.05	50–54	$0.23
25–29	$0.06	55–59	$0.43
30–34	$0.08	60–64	$0.66
35–39	$0.09	65–69	$1.27
40–44	$0.10	70 and over	$2.06
45–49	$0.15

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Box 12 and Box 14, Decoded

The IRS calls it: the Box 12 codes, Form W-2 instructions

Code	What it is	Effect on the return
C	Taxable group life over $50,000	Already in Box 1; nothing to do
D, E, G, S	401(k), 403(b), 457(b), SIMPLE deferrals	Already out of Box 1; may support the Saver’s Credit; limits checked across all employers
AA, BB	Roth 401(k), Roth 403(b)	No deduction; counted toward the same limit as D/E
DD	Total cost of employer health coverage	Information only; not taxable
W	HSA contributions, employer and payroll	Form 8889; reduces what you may still contribute yourself
V	Income from exercising nonstatutory stock options	Already in Box 1; add it to the basis of the shares sold
Y / Z	§409A deferral / §409A failure	Z is taxable now with a 20% additional tax
P	Excludable moving reimbursement (military only)	Form 3903
T	Adoption benefits	Form 8839
FF	QSEHRA permitted benefit	Affects the premium tax credit
GG, HH	§83(i) qualified equity grants	Deferral of income on private-company stock
II	Medicaid waiver payments excluded under Notice 2014-7	Can be counted as earned income for the EITC

Box 14 is the employer’s free-text box, and what lands there depends on the payroll company: S corporation health insurance (needed for the Schedule 1 deduction), union dues, Colorado FAMLI premiums (not deductible), PERA contributions, personal use of the vehicle, charitable payroll deductions, after-tax retirement contributions, and the state disability and paid-leave taxes other states charge. Box 14 items are not in Box 1 unless the item is taxable; read the label. Box 10 is dependent care benefits and feeds Form 2441; Box 11 is nonqualified plan distributions; Box 13 tells the IRS you were covered by a retirement plan, which decides whether your IRA contribution is deductible.

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Colorado

The IRS calls it: nothing; Colorado calls it Box 16

Colorado wages in Box 16 equal Box 1 for nearly every employee, because Colorado starts from federal taxable income and has no wage adjustments of its own. Two things to know. PERA and other Colorado public-pension contributions are pre-tax for federal purposes and come out of Box 1 like a 401(k); they are not an addback. FAMLI premiums (0.45% of wages for the employee’s share in 2026) are withheld after tax, shown in Box 14, and are not deductible anywhere; the benefits paid under FAMLI are taxable for federal purposes as the state reports them on a 1099-G or W-2 (verify current FAMLI treatment). A Colorado resident working in another state has that state’s wages in Boxes 16–17 and takes the credit for taxes paid; see moving to or from Colorado.

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Questions we get

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What to bring

• Every W-2, including the ones from a job you left in February and the one for third-party sick pay
• The last pay stub of the year, which shows the gross and every deduction the W-2 summarizes
• Form 1095-C from the employer and any HSA statements (Form 5498-SA) so the code W amount can be reconciled
• For stock options, RSUs or an ESPP: the broker’s supplemental statement showing the compensation already included in Box 1
• For an S corporation owner: the premium statements, to confirm the Box 14 amount
• If something on the W-2 looks wrong: the pay stub that disagrees with it, so we can ask the employer for a W-2c

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Figures reflect the 2026 tax year as currently published and are rounded for readability. Items marked (verify) are to be confirmed against IRS or Colorado DOR sources before the figures freeze in December. Written October 26, 2026.