Box 1

• Box 1 on the Form W-2 is where you list your employee's wages, salary, tips, bonuses, prizes and commissions. If you've paid the employee any taxable fringe benefits, add the value of the benefits here too. You may have to include some tax-exempt income here: If your employee has contributed part of his wages to a tax-free health savings account, that money still goes into the box 1 total. Other income, such as scholarships, goes in box 1 if it's taxable, but not if it's tax-free.
  
  

Box 12

• You use box 12 on the form to report various other types of income, many of them nontaxable. For example, you report sick pay that isn't subject to income tax in this box. You also use box 12 to report nontaxable combat pay, tax-free payments to help employees with adoption costs and tax-free contributions to certain retirement plans. The Form W-2 instructions give you letter codes for identifying each kind of income you report here.
  
  

Reimbursement

• If you reimburse an employee for money she spent on mileage, business lunches or other business expenses, the reimbursement is not taxable. If you pay above an IRS-set level, however, the IRS will treat the excess as wages, and therefore subject to income tax. When filling out the Form W-2, list the amount of tax-free reimbursement in box 12, and include the excess income in box 1. The same principle applies if you reimburse an employee for moving expenses.
  
  

Filing

• In addition to sending a Form W-2 to your employee, you also have to file a copy with the IRS, along with a Form W-3. Paper Forms W-2 are due at the IRS by the end of February; if you file electronically, the forms are due by early April. If you fail to file, the IRS can penalize you, but you can request an extension. The maximum penalty for not filing Forms W-2 is $100 per form, to a total of $1.5 million a year.