Why W-2 box 16 can show more state wages than box 1 shows federal wages

A $65,000 earner who puts $5,000 into a 401(k) gets a W-2 showing $60,000 in box 1 and, from a Pennsylvania employer, $65,000 in box 16. Pennsylvania taxes the deferral, which costs $154 for tax year 2026 (the return filed in 2027). Boxes 15 to 20 are the state and local half of the form, and each state writes its own rules for them.

Six boxes, two states and two localities

The IRS gives employers one paragraph for the bottom row. The 2026 W-2 instructions say the boxes "can be used to report wages and taxes for two states and two localities," each kept apart by a broken line, and "if you need to report information for more than two states or localities, prepare a second Form W-2." A second W-2 from the same employer is therefore not a mistake. Read across one row:

• Box 15: the state's two-letter code and the employer's state ID number, which the instructions say "are assigned by the individual states."
• Box 16: wages as that state defines them.
• Box 17: state income tax withheld, a prepayment that your state return later squares against the tax you owe.
• Box 18: wages as the city, county or school district defines them.
• Box 19: local income tax withheld.
• Box 20: the locality's name.

The IRS defines box 1 and tells employers to leave out "elective deferrals (such as employee contributions to a section 401(k) or 403(b) plan)." It does not define box 16. That gap is where the two figures part.

Pennsylvania keeps every deferral in box 16

The PA-40 instructions say it in two sentences: "The amount in Box 16 of your Form W-2 may be different from the amount in Box 1. PA law requires a PA employer to follow PA income tax rules to determine Box 16." The rule they point to is in the Department of Revenue's gross compensation guide, which lists "employee contributions to an eligible Pennsylvania retirement plan and contributions to a qualified deferred compensation plan" under "Income Items Always Taxable as Pennsylvania Compensation."

Pennsylvania has no standard deduction, so the cost of the deferral is the flat rate on all of it: $5,000 × 3.07% = $154. A 401(k) and a 403(b) are treated alike. For box 17, the instructions ask for a statement from your employer if Pennsylvania tax was withheld "at a rate that is more than the 2025 tax rate of 3.07 percent."

New Jersey splits the 401(k) from the 403(b)

New Jersey draws the line by plan type. Its employer guide, NJ-WT, lists "401(k) contributions up to the federal limit" as compensation New Jersey does not tax, then tells employers to include in box 16 "employee elective amounts contributed to all types of pension plans, except elective contributions to IRC section 401(k) Plans." A 403(b) or 457 deferral stays in.

The NJ-1040 instructions spell out what that does to the form: contributions to plans other than 401(k)s "may cause your State wages (box 16) to be higher than your federal wages (box 1)." Line 15 of the return says to "use 'State Wages' from box 16 of your W-2, not federal wages (box 1)." Two neighbors on the same $65,000 salary, one deferring $5,000 into a hospital's 403(b) and one deferring the same amount into a 401(k), copy different numbers onto line 15.

The table assumes a single filer with no other pre-tax deductions. New Jersey's $1,000 personal exemption leaves taxable income of $59,000 without the deferral and $64,000 with it, and both sit in the band that runs from $40,000 to $75,000, so the whole $5,000 is taxed at one rate. Our New Jersey 2026 entry is provisional: it carries the 2025 schedule forward until the Division of Taxation publishes a 2026 one.

A Pennsylvania resident with a New Jersey job

Box 15 names the state that withheld, which is not always the state that taxes you. Under the PA/NJ reciprocal agreement, "compensation paid to Pennsylvania residents employed in New Jersey is not subject to New Jersey Income Tax," and the reverse holds for New Jersey residents working in Pennsylvania. A Pennsylvania resident hands a New Jersey employer Form NJ-165 to stop New Jersey withholding. If a New Jersey row shows up in box 15 anyway, the Division says you "must file a New Jersey nonresident return to get a refund." The agreement covers wages only, so it does not reach self-employment income or a gain on property.

Boxes 18 to 20 run on a third definition

Local wages follow local law, which need not match the state's. Ohio cities tax "qualifying wages," defined in Ohio Rev. Code §718.01 as Social Security wages "without regard to any wage limitations." The section then subtracts section 125 cafeteria-plan amounts and adds back any "amount described in section 401(k), 403(b), or 457" that is not already included. The add-back "applies only to employee contributions and employee deferrals." The $5,000 deferral that box 1 drops stays in an Ohio city's box 18. A health premium paid pre-tax through a cafeteria plan comes out of it.

Indiana's county income tax adds a date rule. Departmental Notice #1 tells employers to "withhold county tax based on the employee's Indiana county of residence as of Jan. 1 of the tax year." A worker who lived in Marion County on January 1, 2026 and moved to Porter County in March is withheld at Marion's rate all year. On the notice's table for periods beginning on or after October 1, 2026, that is 2.02% against Porter's 0.5%. Rates and the cities that levy them are in our local income tax roundup.

How TaxMath reads these boxes

Our state engine takes wages and withholding from each W-2's state rows, box 16 and box 17, rather than from box 1, with one declared exception. Where a W-2 carries no New Jersey row, the New Jersey module falls back to box 1, which can only understate a 403(b) or 457 saver's New Jersey wages, and New Jersey's list of known gaps says so.

If your Pennsylvania box 16 comes out lower than your box 5 Medicare wages, the PA-40 instructions list that as a case where you must complete and include the PA-40 W-2 Reconciliation Worksheet. Run $60,000 and $65,000 for your own state in the calculator to price the gap between box 1 and box 16.