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W-2 and W-4: A Simple Breakdown

Form W-2 is a year-end tax form that employers fill out to report the total wages they paid their employees. It’s often confused with Form W-4, which is for employees to fill out once, at the start of their employment.

W-2 vs W-4 cheat sheet

Here’s some simple shorthand for thinking about IRS Form W-2 (Wage and Tax Statement) and IRS Form W-4 (Employee’s Withholding Allowance Certificate).

The W-4 is all about input—the employee telling you what to do with their withholdings. The W-2 is all about output—telling the IRS what’s been done in the previous year. Form W-2 is one of the most common forms small business owners are required to submit, while every employee needs to file a W-4.

W-4 Form W-2 Form
A form employees fill out in their first month of employment A form employers fill out each year for their employees
Tells employers how much federal tax to withhold from their pay check Reports what you paid your employees over the course of the year
Fill out one for each employer Fill out one for each employee
One-time submission Annual submission

How to use W-2 tax forms

Who fills it out: The employer

Who it’s for: The employee, and the IRS

IRS Form W-2

A W-2 form is a year-end tax document that you’ll fill out as an employer. Simply put, it’s a report on what you paid the employee over the course of the year—including bonuses and tips—and total payroll taxes—income withheld for things like social security, pension, Medicare taxes, or savings.

It also reports how much federal income tax you withheld. The amount of taxes you withhold will depend on the the employee’s total wages for the year.

Every one of your employees gets a W-2 (usually by mail) at the end of the tax year. They’ll use the information from their W-2 to complete their tax return. While the W-2 lists their income tax withholding, and employee may lower their tax liability after the fact by filing deductions or using tax credits.

As an employer you’ll also submit an electronic copy directly to the IRS—usually by January 31 for the previous year.

How to use W-4 Tax Forms

Who fills it out: The employee

Who it’s for: The employer

IRS Form W-4

Completing a W-4 is essential any time someone starts a new job. Everyone who works for you needs to fill it out and submit it in the first month of their employment. It tells you exactly how much money you should withhold from the employee’s paycheck for the IRS. This will be based on their wage, as well as the number of allowances they qualify for.

Every employee’s paycheck is different, and every employee will have different financial plans. Some employees might set a conservative tax withholding to ensure they don’t owe any at the end of the year (and get a tax refund). Others might have an aggressive retirement savings plan. The W-4 tax form is where they tell you, the employer, exactly how they’d like to approach this.

Employees can estimate how much of their income will be withheld based on information on their W-4 by using the IRS tax withholding calculator.

W-4 Tax Allowances

Everyone has a certain “tax allowance”—a number that determines how much or how little tax should be withheld. That number varies depending on their marital status (whether or not they’re head of household) and number of dependents. A single dad with three kids will have a greater tax allowance—so less tax will be withheld. A high earning single person will have a lower tax allowance, so it’s a good idea to withhold more tax.

Don’t worry, the W-4 form instructions spell this out in plain language. It’s a good idea for employees to fill out a new W-4 every year, or any time their personal or financial situation changes. They can do it easily online, at any time.

State-specific forms

While some states also use W-4 forms for state taxes, others don’t. You’ll need to ensure your employees fill out forms for both federal withholdings and state tax withholdings. Find out what form you need, by state.

Do 1099 employees get a W-2?

Nope. Independent contractors aren’t eligible for a W-2 form. Instead, you’ll complete a 1099-MISC form for them at the end of the year. The 1099-MISC isn’t just for contractors: if you’ve paid anyone more than $600 for a service (or rent) in the course of the year—think your landlord or your lawyer—you’ll give them one too. The IRS website has a full list of anyone who might need to receive a 1099-MISC.

Each of these vendors and contractors will need your Taxpayer Identification Number and Certification to file these taxes. How do you share that? Use a W-9 form.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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