We all are aware of the Form W-2, the pay slip given by our employer. It is not just a pay slip, but a very important document in terms of taxation. Wages and salaries comprise a major portion of your taxable income if you are employed. Hence, for the IRS to calculate your taxable income your Form W-2 has to be submitted.

W-2 provides information about your taxable wages, federal withholding, advance EIC which increases your tax liability, whether you are a statutory employee, whether you participate in any retirement plans and also your contributions to SDIs and other social and local taxes.

Taxability of Compensations:

Compensations or Reimbursements received from the employer are sometimes taxable. Advance commissions are taxable in the year they were received. Some part of your traveling reimbursements and moving expenses reimbursements are taxable as wage income. Bonuses and awards are also included in income. The cost of tangible property received as an award from the employer is not included in the income. Education Assistance is also excluded up to some extent. Contributions by the employer to a qualified retirement plan are excluded from income whereas the contributions to a non-qualified plan are considered as income. The profit from trading of ESOP shares is also taxable to some extent, but that is treated as Capital gain and not as a wage income.

A few tips to control taxability:

• Health Insurance premiums paid by your employer are not taxable. So when you get a salary hike you can ask your employer to increase the insurance premiums instead. It helps you and the employer as well. Your tax doesn’t increase and your employer gets more deduction on his return for paying your insurance premiums.

• Education expenses spent by the employer on your training are deductible on the employers return and you can get an increase in your wages in a non-taxable way. But there is limit to the amount of expense.

• Instead of buying a car, use company’s car because the tax preset will be much lower than the actual buying and maintenance costs. Just understand the possible deductions and you will know how to convert your pay hike into your non taxable income and your employer’s deduction. Two birds in one stone and none will get hurt.