Business tax return - form W3 - should I use box 1 or box 2 number when reporting salaries & wages?

[Mari_3251]

I started an IRA plan this year for the employees.  When I received the W3 form, box 1. Wages is less than Boxes 3 & 5, social security and Medicare wages respectively - which I clearly understand the reason why.  I also understand the business expense side of a matching contribution.  However, I need help in figuring out what number to use for Salaries & Wages when filing my business tax return.  After all, my expense as business was the full earnings amount from which then the employees decided to contribute to their own retirement plan. 

Example:

Form W3

Box 1 Wages: $10,000

Box 3 & 5:  $8,800 

Total amount employees contributed to their IRA is $2,200

Business Tax Return Form 1120-S

Lines 7 and/or 8: Should I use number in Box 1 (which matches W2's) or number in Box 3 & 5 (which matches total earnings)

and if it's boxes 3 & 5 number $8,800, where does the $2,200 go?  Note the $2,200 is the employee contribution, NOT the employer match.

I appreciate the help.  Thank you in advance.

[PatriciaV]

Yes, you should report wages that you actually paid. This number usually ties to Form W-3 Box 3. The employee retirement contributions are taxed for Social Security or Medicare purposes, but not FIT, which is why Boxes 3 & 5 are more than Box 1.

[Edited 2/20/2022 | 7:06 am PST]

[Mari_3251]

Ok. So where do I report the $2,200? The portion of the gross wages that employees decided to put in their IRA.

[PatriciaV]

Please note the edit to my previous post - you will report Gross Wages (Box 3) on Form 1120S Line 8. The difference between Box 3 and Box 1 is due to tax differences from retirement contributions.

Employee contributions to a tax-deferred retirement plan are included in Gross Wages, but are not expenses to your business that are reported separately on Form 1120S. But matching funds paid by the business would be a compensation expense under Benefits. Payroll taxes (employer portion only) are also business expenses.

In summary:

Employee wages, employer portion of taxes, and employer-paid benefits are considered Employee Expenses reported on the business return.

Employee deductions for employee portion of taxes and employee-paid benefits (health insurance, retirement, etc.) are included in gross wages, but not recorded as business expenses. Most businesses record these items as liabilities until they are paid to the appropriate agency.

For more info, see IRS Instructions for Form 1120S, Line 7 & 8.

[Edited for clarity and to include IRS link 2/20/2022 | 7:39 am PST]

[Mari_3251]

Ok. Thank you for your help.  Basically:

Employee:

Gross Wages $1,000

IRA contribution $200

Health Insurance $50

Business 

Earnings expense $1,000 

Employer IRA match $130

W3 box 1 says it's $800

I get the liability side of it until it's paid/deposited, but what kind of GL account is the employee contribution account if not an expense (asset, liability, etc.)?  My total earnings expense is $1,000 not $800, where is the difference recorded in the tax return? could it be either line 17 or 18 of the 1120S form?  thanks again

[PatriciaV]

In your example, $1,000 would be Wages/Earnings Expense (Form 1120S Line 8) and $130 would be Retirement Plan Contributions (1120S Line 17). Total expense to employer = $1,130.

Employee was paid $1,000, of which $200 went to IRA and $50 to health insurance. Net pay to employee before taxes = $750.

On your accounting records, the payroll deductions that are not employer expenses would be on the balance sheet as liabilities until paid.

[Mari_3251]

The issue that I'm encountering is that W3 form box 1 is $800 (using the same example as above) which in turn matches with the employee's W2 box 1.  Should I ignore box 1 number and use box 3 number instead for Form 1120S Line 8?  That's my main concern :).  The difference is the $200 employee contribution.  Thanks again. 

[PatriciaV]

Yes, use the amount from W-3 Box 3 for your Salaries/Wages on Form 1120S Line 8.

The $200 difference reduces the employee's income tax - but is already included on Line 8 of the business return.

[Mari_3251]

Thank you

[PatriciaV]

Sorry it took so long to get to the answer you needed. 🙂

[Mari_3251]

oh no problem.  I don't think I was explaining myself well.  Thank you so much for your time.  Very appreciated.

[stevescott]

Actually Box 5 would be more correct as Box 3 cuts off for SS.

[jjh2024]

Thank you for asking this question!  This was super helpful.  TurboTax makes it more confusing by saying the amount entered must match box 1 of the W3.  I had a difficult time getting ADP to understand that even though the employee is deferring their taxes on this money it was still money that I paid as an employer and it is not accounted for in Box 1's total.