Most employees have certainly come across both W-2 and W-4 forms at different points in their careers. So, let's take a look at the difference between the two and when each is used.
A W-4 form is filled out when you first start a new job. It outlines how much of your paycheck is withheld and sent to the IRS. Your employer fills out a W-2 for you yearly, and it includes details of your income and the amount withheld for taxes. Your W-2 is a key part of your annual tax return.
Take a closer look at the details of these forms, so you have a better idea of when you will be coming across each one and know how you can fill them out accurately.
W-2 vs. W-4: What to Know
Every tax season comes with a host of different concerns, from what one can claim to why one owes the IRS a certain amount. To get started, it's important to have a fundamental understanding of the basics of taxes, and it doesn't get more basic than the W-2 and W-4 forms. Let's talk about what exactly these forms are for.
What Is a W-4 vs. W-2?
Understanding the difference between the W-4 and W-2 forms is all about understanding who the paperwork is filled out for. Your W-4 is used to determine what your employer needs to withhold and send to the federal government. At the end of every year, your employer fills out a W-2 form with your information to indicate the tax withheld. What the IRS determines you owe and what was actually taken is then used to determine if you get a refund or if you need to pay the difference.
A Closer Look at the W-2 Form
Employers are required by the IRS to report salary information and wage details for their employees via a W-2 form. These forms contain the necessary details about what you paid to the state, federal government, and other departments collecting tax. You will also see details on other benefits your employer is collecting for, such as health insurance, care assistance, health savings, and more. This document is very important when you do your tax return at the end of the year.
Generally speaking, when you start working with an employer, you need to fill out paperwork detailing how they should deduct funds from your paycheck. You should then get this form sent to you by January 31st every year. This should give you enough time to get your tax returns ready. To summarize, the W-2 is how the IRS tracks your income from year to year.
A Closer Look at the W-4 Form
The W-4 is the IRS form you complete for your employer. Through the details of this form, they will understand what needs to be withheld for the federal government from your paycheck. The more accurate your W-4 is, the less likely you will have a substantial balance to pay at the end of the year.
This form is generally completed on the first day of a new job. Like many people new to working, you may not understand what a W-4 is and its effect on your taxes. However, this entails making an important decision, especially when choosing the amount to withhold. You may consult a more experienced friend or coworker on how best to fill out your paperwork. You can file a new W-4 in the future if you decide to change your allowances and withholding.
An Overview of the Major Differences Between the Forms
Based on the information outlined above, there are a few key differences between W-2 and W-4 forms, including:
- Who fills them out: You fill out the W-4, and your employer fills out the W-2.
- How frequently each is filled out: The W-4 only is filled out once (per job) unless you need to make changes in the course of your employment. The W-2 is filled out every year.
- When each is filled out: The W-4 is filled out within a month of starting a new job, and the W-2 is filled out early in the year, by January 31st at the latest.
How to Fill out the W-4
As mentioned, you are responsible for filling out a W-4 form when starting a new job. Since this is an important form that affects your taxes, it is good to have a thorough understanding of what information you will have to input.
The form starts with some basic information, including:
- Your social security number
- Your full name
- Your home address
- Your marital/tax status (single, married, or married but filing separately)
One of the most important and confusing facets of the form is what allowances you want to claim. Claiming more allowances reduces the amount that is withheld from your taxes. Be careful because if you don't choose to withhold enough taxes, you may owe the IRS money when tax season comes instead of receiving a refund.
Some of the potential allowances you may have include:
- Having a qualifying dependent or child
- Taking itemized personal deductions
- Having multiple jobs
How to Decide Your Allowances and Withholdings
As mentioned, if you claim too many allowances, your employer may not withhold enough for the IRS throughout the year. This could mean owing more taxes by the time tax season rolls around. At the same time, you don't earn interest on the withholdings the IRS keeps for you. It may also make more sense to have the money on hand and either not receive a refund or owe the IRS money. Just be wary of penalties and interest you can owe the IRS.
So, if you are concerned about owing taxes, interest, or other penalties, increase your withholdings by decreasing your allowances. This makes sense if you have multiple jobs or receive income from another source that doesn't have withholding tax. It may also make sense if your spouse is also employed.
On the other end of the spectrum, you may want to increase your allowances and decrease your withholding taxes if you know you will have tax credits or deductions. Credits for dependents, including children, is a common example of this.
What If You Don't Fill Out a W-4 Form?
Now you know that you are required to fill out a W-4 form as part of the onboarding process for a new job. But what happens if your employer doesn't give you the form, you forget, or you just don't realize you need to fill it out?
Your employer will automatically withhold your taxes using the highest rate for single filers. There will be no adjustments involved. This means that you will get less on each paycheck after deductions, but you will get a larger tax refund.
How to Fill Out the W-2
As mentioned, your employer will fill out your W-2. Since it will involve your income, it's still smart to understand what will be included in this form. This will help you understand how your taxes are deducted and how to use the form when filing your taxes.
For starters, let's look into when your employer should be filling out a W-2 form. When you have been paid at least $600 by the company, your employer is required to fill out the form. This is true even if you didn't withhold income or taxes.
Included in the form are the following details:
- Employer identification number (EIN) of your employer
- Your social security number
- Your address
- Your employer's business address
- Your total compensation during the year, including tips and wages
- Your withholdings for the year, including federal income tax, Medicare tax, and social security tax
How to Use the W-2 on Your Taxes
Before you can file your taxes, your employer must provide you with your W-2 form. Employers must submit the form by the end of January, giving you several months to file your taxes in time for the April deadline.
Having the W-2 on hand streamlines the process of filing your taxes. You won't have to calculate how much you were paid throughout the year or how much was withheld, as those details will be included in the form. When filing your taxes, you will calculate how much you owe in taxes based on the income from your W-2 forms and other sources. Then, you will subtract the amount already withheld, as listed on your W-2.
How Is Withholding Tax Determined?
The amount of income tax withheld is based on your number of allowances claimed and your marital status. Any other adjustments included on the form can also factor into the income tax paid.
What If I Didn't Withhold Enough?
You have the option to complete another W-4 to adjust what is being withheld moving forward. Further into the year, you may want to have a set amount withheld to compensate for insufficient payments earlier in the year.
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A W-4 form is filled out once when you start a new job. Through this form, your employer will know how much taxes to withhold from your paychecks. Should you want to make revisions in the amount withheld, you can file a new W-4 later on. On the other hand, your employer files a W-2 form once yearly, outlining how much you were paid and how much was withheld. You use this form to file your taxes during tax season. Choosing to withhold more from each paycheck increases your tax refund. If you withhold too little from each paycheck, you may owe more taxes at the end of the tax year.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.