Paystubs vs. W-2s: What's the Difference?

Paystubs vs. W-2s: What's the Difference?
June 2, 2023
Time to read: 5 Minutes
June 2, 2023
6 min read

Pay Stub Deduction Code: Definiton, Existence, Kinds, Benefits and Limitations


Employers and employees scramble to prepare their financial statements and reports during tax season. This ensures they can submit their tax returns on time, as the US government requires. Two documents have come up and need clarification for employees. These are pay stubs and W-2 forms. Employees sometimes need help telling the difference between them, which can make tax season confusing.

Additionally, the information and figures written on both these documents tend to differ, making them think there is some mistake. Not to worry, we have you sorted out. In this article, we will discuss their main differences so that you can understand precisely how pay stubs and W-2 forms work. Without further delay, let's dive in.

What are pay stubs and W-2s?

Before we understand their differences, it is a good idea to understand what each document is. Pay stubs are documents detailing an employee's gross wages for each pay period, usually monthly. Essentially, they provide a clear outline to employees of their payment and can act as proof of income, as they are generally attached to a physical paycheck. However, online pay stubs are beginning to grow popular, and Real Check Stubs specializes in them.

On the other hand, W-2 forms, aka Wage and Tax Statements, are required documents that employers must send their employees. The employees choose if they want to make contributions like 401(k) and healthcare contributions, after which the employer sends the receipt to the IRS. The wages, besides these contributions, are considered taxable. In this way, a W-2 form can be regarded as an annual after-tax pay stub.

1. Pay Stubs show gross earnings without tax deductions or withholdings.

A critical difference between pay stubs and W-2 forms is that Pay Stubs are the employer's documents detailing the total amount you earned before taxes and deductions. It also showcases the net pay, the actual amount you receive. On the other hand, the W-2 form displays the wages after any pre-tax deductions that have been made. Some pre-tax deductions that lead to taxable wages are health insurance plans, life insurance, and 401(k) contributions. Hence the wages on the W-2 form will likely appear lower than those on paystubs.

2. Non-Taxable Income Earnings are included in pay stubs but not in W-2 forms.

Non-taxable items are not included in an employee's W-2 form because they are not taxable to the employee. Various non-taxable items could be involved, including reimbursements for mileage and allowances for food and travel. This leads to a difference in figures between pay stubs and W-2 forms caused by non-taxable items lowering gross taxable wages. For example, suppose you as an employee receive $5000 as mileage allowance while having gross wages of $60,000. This will make the wages on your W-2 form $55,000, as 60,000-5000 = 55,000.

3. Participating in a company-sponsored retirement plan will reduce certain taxable wages.

Specific retirement plans, like a 401(k), reduce your taxable state and federal wages. These wages are reported in Boxes 1 and 16 of the W-2 form and are considered pre-tax reductions. Suppose you are an employee whose gross wages are $40,000 and contribute $5000 towards a 401(k) retirement plan each year. Since the W-2 only reports taxable portions of the salaries, this would mean that $35,000 will appear on the W-2 form, while the gross wages ($40,000) will appear in the pay stub.

4. Participating in a pre-tax health insurance plan through the employer company.

Participating in pre-tax health insurance is usually the primary reason most taxpayers have differing figures on their pay stubs and W-2 forms. This is because it lowers the taxable wages reported in Boxes 1, 3, 5, and 16 of the W-2 form. The amount you pay for this health insurance will be eliminated from your taxable wages. For example, suppose you spend $5000 for your pre-tax health insurance per year while having gross wages of $60,000. This will make the taxable wages on your W-2 $55,000, while the gross wages on your pay stub will be $60,000.

5. The period for payroll wages differs from the calendar year.

The rule of the IRS is that only the paid wages are reported rather than the earned ones. This sounds confusing, so that we will simplify it with an example. As an employee, you are paid monthly wages for the work done in the previous month. For example, your wages on January 1st are earned for the work done during December. In this case, your pay stub will display the pay for December, but this will not be considered in your W-2 for the following year. In essence, the IRS only cares about the wages paid in a calendar year, so what your pay stub says in this instance is irrelevant. The pay stub is simply a receipt from your employer and lets you keep tabs on your payment from the employer.

Specifics of W-2 Form

Now that we have touched on the main differences, it is a good idea to understand the specifics of the W-2 form. You will have noticed that we mentioned Boxes 1, 3, 5, and 16 in this article. This is because they are essential to understanding the differences and ensuring you get everything right during tax season. So, let's look at each of their functions.

Box 1

Box 1 refers to the employer's gross taxable wages and will depend on the employee's industry and role. It includes salary, wages, tips, bonuses, commissions, etc.

Box 3

Box 3 refers to the amount of earnings that are subject to Social Security Tax. It is important to note that tips are not considered part of these earnings.

Box 5

Box 5 refers to the amount of earnings that are subject to Medicare Tax. Unlike Box 3 earnings, the amount includes tips and wages.

Box 16

Box 16 refers to the amount of earnings that are subject to state tax. This tax will vary depending on the state that you are in, so it is a good idea to refer to your local government for that. It is important to note that certain conditions in the US do not collect personal income tax.

The bottom line

Pay stubs and W-2s report salaries, yet they tend to differ in the figures provided. In this article, we have determined the key differences that will ensure you will be able to calculate precisely why these differences exist. Pay stubs are generally receipts showing an employer's salary, including non-taxable earnings. On the other hand, W-2 forms ignore these but consider taxable withholdings and deductions and factor these to offer taxable wages. Additionally, when a taxpayer invests money towards pre-tax plans, this amount is subtracted from the taxable wages that appear in the W-2 form while still appearing on pay stubs. Please take a good look at boxes 1,3,5, and 16 to ensure that you can have the best understanding of Form W-2 and examine the differences.

We hope this article has been insightful and has helped you understand the critical differences between pay stubs and W-2s. Thank you for reading!