A platform sends a client a Form 1099-K for $12,000 when the client's own books show $10,600. Both numbers can be right. The return has to reconcile them.
Section 61 of the Internal Revenue Code defines gross income as all income from whatever source derived. For a worker's pay, that means compensation is taxable unless a specific rule excludes it. So start every wage question by treating the pay as income, then look for a rule that takes it out.
Form W-2 is the year-end wage statement an employer gives each employee. Its box 1 reports taxable wages, salaries, bonuses, severance, commissions, reported tips, and taxable fringe benefits (perks with a cash value, such as personal use of a company car).
These W-2 boxes tell you where amounts go on the return:
- Box 1: taxable wages, salaries, and other earnings, which go to Form 1040 line 1a.
- Box 2: federal income tax withheld, which goes to Form 1040 line 25a.
Common mistakes
- Adding box 1b to box 1a. Qualified dividends of $3,100 are already inside $4,800 of ordinary dividends. Adding them reports $7,900 of dividends, and the extra $3,100 is phantom income because it is counted twice.
- Applying the current-year SALT cap to a prior-year refund. A 2024 recovery uses 2024 law, because the question is how much the deduction helped in 2024. The $40,000 2025 cap does not govern a deduction taken in a different year.
- Treating tips and overtime deductions as wage exclusions. The $2,400 in tips stays in W-2 box 1 and in Social Security wages. The deduction lowers only taxable income.
Bottom line
- Wages: everything in W-2 box 1 is gross income; the 2025 Schedule 1-A tips and overtime deductions cut taxable income, not wages or payroll tax.
- Statutory employee: box 13 checked means Schedule C reporting with expenses, and no self-employment tax.
- Interest: Treasury interest is federally taxable and state-exempt; municipal interest is federally non-taxable but still reported on line 2a.
- Schedule B is required above $1,500 of taxable interest, or for nominee, foreign-account, or savings-bond-exclusion facts; the 2025 Form 8815 phaseout is $99,500 to $114,500 single and $149,250 to $179,250 joint.
Exam shortcut
Work every income stem as source, character, destination, in that order. The source names the form, the character names the line, and the destination is never inferred from the form alone. Stem signals worth memorizing. "The form shows" plus a mismatch with the client's records means reconcile, never suppress. "Took the standard deduction last year" ends a refund question at zero.
The full lesson (about 4,846 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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