W-2 vs. W-4: What’s the Difference?
Understanding these two tax forms is critical for employers and employees.
- February 12, 2020
- Small Business Finances
- 8 min read
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Taxes can feel intimidating, even if your tax return is fairly straightforward. One common source of confusion comes from the various names for tax from the Internal Revenue Service (IRS) such as I-9, W-2, W-4, 1099 and so on.
If you’ve worked as an employee at a company, or have been employed people yourself, then you’ve certainly encountered IRS forms such as W-2s and W-4s. While they may share similar names, a W-2 form is very different than a W-4 form, while also being related to one another. Whether you’re an employee or an employer, it is important you under the distinctions between these two tax forms. Read on to learn the difference between W-2 and W-4 tax forms and what purposes they serve in regards to your tax return.
A W-2 tax form reports the amount of taxes withheld from your paycheck for the year. The W-2 form is the form you receive at the beginning of the calendar year that you use to file your federal and state taxes for the prior tax year. Therefore, you should only receive a W-2 if you are an employee. If you’re a freelancer, independent contractor or self-employed, you will receive an earnings statement on tax form 1099 instead of a W-2. Here’s a look at what is in a W-2 form.
The W-2 form is divided into boxes that report various items relating to your income. In box 1 of the W-2 form, you will find your gross income, which shows how much money you have earned at your employer without any taxes taken out yet.
In Box 2 of W-2, you’ll find how much of your gross income was taxed. Specifically, it shows how much federal income tax was withheld from your wages.
There are additional boxes on a W-2 form. Here’s a few of them that pertain to most employees and cover:
- Box 3 – Social Security wages: The part of your income that can be taxed for Social Security.
- Box 4 – Social security tax withheld: The amount taken out of your wages for Social Security funding.
- Box 5 – Medicare wages and tips: the part of your income that can be taxed to support Medicare.
- Box 6 – Medicare tax withheld: The amount taken out of your wages for Medicare funding.
Other boxes on the W-2 are informational in regards to you as an employee and your employer. Boxes include you, the employee’s, Social Security number; your employer’s federal tax ID number called an EIN; your employer’s name and address; and your name and address.
Your employer is obligated to send you your W-2 form, by mail and/or digitally, by the last day of January each year, giving you ample time to file your personal tax return before the mid-April deadline.
Here two of the main takeaways you should note about W-2 forms:
- Who fills out W-2 form: Your employer
- Who is a W-2 for: You — the employee — and the IRS
If you’ve had multiple employers in a single tax year, you should expect a W-2 form from each employer in order to file your taxes.
Form W-2 is essential for tax purposes. The IRS requires employers to report wage and salary information of their employees on Form W-2. Your W-2 will also report the amount of federal, state and other taxes withheld from your paycheck, as well as any contributions made to an employer-sponsored 401(k) account. Therefore, as an employee, your W-2 is very important when preparing your tax return. To make sure you can make federal tax deadlines, the IRS requires your employer to send you a W-2 no later than January 31 following the conclusion of the tax year, which is usually December 31.
Form W-2 is important for several reasons. Your employer withholds amounts from your paycheck for federal and state income taxes throughout the year, all the while remitting them to the IRS. The federal tax deadline may be April 15, but the IRS requires everyone to make periodic payments throughout the year. Instead of you the employee dealing with this, however, your employer manages these withholdings for you.
When it comes time to file your federal tax return and calculate your taxes for the year, the withholding amount your employer reports on the W-2 is subtracted from your tax bill. Once you subtract this amount, you can determine whether you should expect a refund or make an additional tax payment. The same calculation works for your state income tax return.
A critically important part of your W-2 is the identifying information section, which works basically like a tracking feature. If the income you report on your tax return does not match the information on your W-2, the IRS will want to know why. On top of this, because the IRS receives a copy of your W-2, it already knows if you owe taxes and may contact you if you fail to submit a tax return. Another identification section that is very important is making sure the name or Social Security number on your W-2 is accurate. If not, you should immediately report this to your employer and correct it as soon as possible.
You’ve likely encountered a W-4 when you start a new job. Everyone who is an employee must fill out Form W-4 and file it within the first month of their employment. The W-4 is an IRS form that lets your employer know how much money to withhold from your paycheck for federal taxes. This is generally based on your wage and the number of withholding allowances you qualify for.
Form W-4 is properly titled as Employee’s Withholding Allowance Certificate. It includes a series of worksheets you can use to calculate the appropriate number of withholding allowances to claim. A withholding allowance, or tax allowance, is essentially like an exemption from paying a certain amount of income tax. Thus, when you claim a tax allowance, you’re telling your employer and the IRS that you qualified not to pay a certain amount of tax. If, on the other hand, you’ve claimed no withholding allowances, your employer will withhold the maximum amount possible.
Once you’ve calculated the tax allowances you qualify for, you must provide some personal information, like your name, address, Social Security number and whether you’re single, married filing jointly or head of household. You will also report your total allowances and any additional withholding amounts on the actual W-4 form.
You should receive a blank W-4 form to fill out during your first month of employment at a new job — it’s typically included as part of your onboarding paperwork along with an employee handbook and direct deposit form, among other documents. If you’re unsure how to fill out a W-4 form, your company’s payroll or HR department should be able to help.
Bear in mind these two key takeaways about W-4 forms:
- Who fills out a W-4: You, the employee
- Who is a W-4 for: Your employer
Form W-4 is used by your employer to know how much money to withhold from your paycheck for federal income taxes. However, it also serves a potentially greater purpose for you as an employee. Namely, Form W-4 helps you withhold extra money from your pay. This can be especially important, for example, if you work more than one job, have self-employment income or if your spouse earns income too. When this happens, the personal allowance worksheet on Form W-4 will not incorporate this other income into your allowances, which could result in too little being withheld. If too little is withheld, you typically will owe taxes when you file your tax return and, worse, owe a penalty fee. If you voluntarily increase your tax withholding on Form W-4, you can avoid having to make an additional lump-sum tax payment when you file and avoid an under-withholding penalty.
Another use for Form W-4 is if you want to declare yourself exempt from withholding. What this means is that your employer will not reduce your salary for any federal income tax. Bear in mind, this is not something you should do just inflate your paycheck. The IRS is aware of any changes you make. You can claim an exemption from withholding if you had no income tax liability in the prior year and you don’t expect a tax liability in the current year. These are rare circumstances.
A W-4 is important due to what it deals with, namely the concept of withholding allowances. The more withholding or tax allowances you claim, the less money your employer will withhold for taxes. The way it breaks down is that you get one allowance for yourself, one for your spouse and one for each dependent you report on your tax return. A key point to keep in mind is that claiming additional allowances can offset tax deductions you anticipate claiming on your tax returns. It also can have tax implications for claiming a certain filing status, such as head of household or if you’re eligible to claim a tax credit for childcare expenses.
Filling out your W-4 accurately can help you from having a large balance due come tax season. What’s more, it can help keep you from overpaying your taxes, and thus put more money back into your pocket.
You’ll usually fill out form W-4 only once when you start a new job, but keep in mind that you can always file a new version to change your withholding. You should consider revisiting your tax withholding any time you experience a major life change, such as having a child or getting married as these circumstances can have a major effect on your taxes.
A good conceptual way to approach the difference between W-2 and W-4 is to see Form W-4 as the input and Form W-2 as the output. Meaning, in Form W-4, you the employee are telling your about the amount of money that they should withhold for your wages, while Form W-2 informs the IRS the amount of money that was ultimately withheld for federal income taxes from their employee over the course of the year.
Here’s a breakdown of some key differences between W-2 and W-4 forms:
|W-2 Form||W-4 Form|
|A form employers fill out each year for their employees||A form employees fill out in their first month of employment|
|Reports what an employer paid its employees over the course of the year||Tells employers how much federal tax to withhold from their paycheck|
|Employer fills out one for each employee||Employee fills out one for each employer|
|Annual submission required by employer for each employee that works at the business||One-time submission by employee for each new employer they work for|
It is important to take away that W-2 and W-4 forms are related, yet completely distinct at the same time. Employers use W-4 forms to gather information from employees in order to calculate how much tax to withhold from employee paychecks. A W-4 is, therefore, an input of sorts. Employers later submit the W-2 form with the IRS and send them to employees by January 31 of the following year in order to report wages and taxes that were withheld. In this way, a W-2 serves as an output. A critical point for both forms is to make sure that all the information is accurate, in terms of your personal identification information, the number of tax allowances you make and the amount of your wages withheld for income taxes.
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