Wages, salaries and other pay, in plain English
What counts as taxable pay, which job perks are tax free, and how pre-tax savings show up on your W-2. A quick read for tax years 2023 to 2026.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 26, 2026.
Chapter 5 of Publication 17 covers pay from a job: wages, bonuses, job perks and sickness or injury benefits. It matters if you get a W-2 or are paid for babysitting and odd jobs. The 2025 edition has it on printed pages 47 to 54, and the 2023 and 2024 editions use the same pages. Think of this page as a friendly summary; the IRS publication has the last word.
- Pay for work is income with or without a W-2, including cash bonuses and severance.
- Many job perks are tax free up to a cap, such as $5,250 of tuition help (2023 to 2025).
- Pre-tax 401(k) savings skip income tax for now but still face Social Security and Medicare tax.
- From 2023 to 2025 only the dollar limits moved, plus a new catch-up for ages 60 to 63.
What counts as pay
Report wages on Form 1040, line 1a, even if no W-2 arrives. That covers salary, bonuses, back pay, severance and cash awards. Babysitting or similar help counts too, even for relatives' or neighbors' children. If you are not an employee, you are probably self-employed and use Schedule C.
These perks are generally tax free:
| Job perk | Tax-free part, 2023 to 2025 |
|---|---|
| Tuition help | Up to $5,250 |
| Group-term life insurance | First $50,000 of coverage |
| Transit pass or parking | A monthly cap, shown below |
Retirement savings from your paycheck
Money you send to a traditional 401(k), 403(b) or Thrift Savings Plan is left out of income-tax wages now and taxed when you withdraw it, but Social Security and Medicare tax still applies. Roth contributions are taxed up front. Watch your combined total across plans; an excess is generally taxed that year. Ages 60 to 63 have a larger catch-up in 2025 and 2026 ($11,250).
Sickness and injury pay
- Disability pay from an employer-funded plan is reported like wages until the plan's minimum retirement age.
- Benefits from a policy you paid for yourself are generally tax free, and so is workers' compensation.
- Long-term care policy payments are tax free up to a daily cap: $420 (2023), $410 (2024), $420 (2025).
Numbers by year
| Tax year | 401(k) limit | With age 50 catch-up | Health FSA | Transit or parking, each per month |
|---|---|---|---|---|
| 2023 | $22,500 | $30,000 | $3,050 | $300 |
| 2024 | $23,000 | $30,500 | $3,200 | $315 |
| 2025 | $23,500 | $31,000 | $3,300 | $325 |
| 2026 planning | $24,500 | $32,500 | $3,400 | $340 |
For 2026, treat the numbers as planning figures (source: Rev. Proc. 2025-32 and Notice 2025-67), since the IRS has not issued Pub 17 (2026).
An invented example
Priya (invented), age 42, earns $62,000 in 2025 and saves $6,000 in a traditional 401(k). Her employer pays for $70,000 of group life coverage at no cost to her.
- Pay after the 401(k): $62,000 - $6,000 = $56,000.
- Coverage over $50,000 is $20,000, or 20.0 units of $1,000. The chart rate for ages 40 to 44 is $0.10 per unit per month: 20.0 x $0.10 x 12 = $24.
- W-2 box 1: $56,000 + $24 = $56,024.
Mistakes people make
- Skipping pay that arrived without a W-2.
- Treating employer cash as a gift. Only small non-cash gifts are left out.
- Forgetting that 401(k) savings still bear Social Security and Medicare tax.
Quick check
Your employer pays for $90,000 of group life coverage, you are 52 and you pay nothing. What is taxable? (2025)
Answer: $110.40. ($90,000 - $50,000) / $1,000 = 40.0, times $0.23 (ages 50 to 54) = $9.20 a month, times 12 months.
Your employer gives you a $350 transit pass each month for 12 months. What becomes taxable? (2024)
Answer: $420. The 2024 monthly cap is $315, so $35 x 12 months is extra.
At a holiday party you get a small ham and $100 in cash. Which is taxable? (2025)
Answer: The $100. Small non-cash gifts are left out; cash never is.
Common questions
Why is box 1 of my W-2 below my salary?
Pre-tax items such as 401(k) savings or a health FSA come out of box 1. The Social Security and Medicare boxes usually do not drop for 401(k) savings.
Is severance pay taxable?
Yes. The full amount counts, even if you accepted less severance in exchange for job-search help.
I babysit for a neighbor and get no W-2. Do I report it?
Yes, regular or occasional. You are probably self-employed, so see [chapter 4](/publication-17/chapter-4-tax-withholding-and-estimated-tax/) on estimated tax.
Official sources
- IRS Publication 17 (2025), chapter 5
- IRS Publication 17 (2024), chapter 5
- IRS Publication 17 (2023), chapter 5
- IRS Revenue Procedure 2025-32 (2026 amounts)
- IRS Notice 2025-67 (2026 retirement plan limits)
Keep reading
- Withholding and Estimated Tax (Pub 17 Chapter 4)
- Other Income: Pub 17 Chapter 8 in Plain English
- IRA Rules for 2023 to 2026: Pub 17 Chapter 9
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