W-2 and W-4: What You Need To Know
The W-2 is a tax form that employers must submit to the IRS at the end of every year for each of their employees. The similar-sounding Form W-4 is filled out by employees and submitted to their employers when they join the organization.
W-2 and W-4: What are they for?
It’s the responsibility of every employer to submit Form W-2 to the IRS at year-end. This form contains details of the annual wages that have been paid to the employee. There’s a separate W-2 for each employee.
What are the particulars it contains?
The employer is required to report every type of payment, including noncash payments. Form W-2 must be filed if the total of cash and noncash payments are $600 or more for the year.
The purpose of Form W-4 is to ensure that employers withhold the correct income tax from each employee’s pay. So, it’s the employee’s responsibility to ensure that the data that’s provided in the W-4 is as accurate as possible.
Remember that the IRS Form W-4 needs to be submitted by employees to the employer only once. Typically, an employee would complete the form immediately upon joining or within the first month of starting on the job. However, in specific circumstances, employees should complete a new W-4. This should be done when they want to inform their employer to increase or decrease their withholding.
The IRS website lists some of the circumstances in which an employee may want to increase or decrease the withholding. It suggests that the withholding be increased when:
- The employee holds more than one job at a time.
- The employee and his or her spouse both have jobs.
- The employee has income from sources other than jobs.
- The employee has income from self-employment on which there is no withholding.
And when should the employer be told to decrease the withholding? Here’s what the IRS says:
- The employee is eligible for income tax credits. For example, an individual could be entitled to child tax credit or credit for other dependents.
- The employee can claim deductions like the one for IRA contributions or student loan interest.
W-2: Understanding the basics
The IRS Form W-2, Wage and Tax Statement, is used to report how much an employee was paid during the year and the amount of tax withheld. It’s important to remember that payments include gross pay, bonuses, and tips.
The details that form W-2 contains include:
- Compensation including noncash compensation
- Federal income tax withheld
- Social security and Medicare tax withheld
- Other withholdings like contributions to retirement plans
Although the W-2 tax form needs to be submitted to the IRS, the employer must provide it to each employee as well. The deadline to file Form W-2 with the IRS is January 31st. This is also the last date by which the form needs to be provided to each employee.
What is the relevance of Form W-2 for the employee?
When an employee files taxes, the information in the W-2 form comes in handy. The gross tax obligation of the employee is reduced by the amount of tax withheld reported in the W-2 form. There could be a situation where the tax withheld by the employer exceeds the tax that is owed. If this happens, the IRS will issue a refund to the employee.
W-4: Understanding the basics
The primary function of the W-4 form, Employee’s Withholding Certificate, is to allow employees to tell their employers how much of their income should be withheld from their paychecks.
Form W-4 provides the employer with some essential information:
- Should income tax be withheld at the single rate (which is higher) or the married rate?
- Which are the allowances the employee is claiming?
- Does the employee want tax withheld for other income that he or she earns that won’t have a withholding? This could include retirement income, interest, or dividends.
Working out the details to be submitted in the W-4 tax form could be complicated. To make things simpler for employees, the IRS has provided a Tax Withholding Estimator. Employees can follow the simple step-by-step instructions to calculate the amounts they need to enter on their W-4 forms.
Employees should compute their withholding as accurately as possible. If they underestimate the withholding, it could lead to the payment of interest and penalties to the IRS in addition to the taxes they owe.
W-2 and W-4: What’s the difference?
Here’s a quick summary of the main differences between the W-2 and W-4 forms:
IRS Form W-2
IRS Form W-4
The IRS and a copy is provided to the employee
The employer. The employer retains the form (it doesn’t send it to the IRS)
Provides details of payments to the employee as well as the amounts withheld
Tells the employer how much to withhold from the employee’s paycheck
How often is it prepared?
Every year at year-end
Only once at the time when the employee starts a new job. However, employees can prepare a new W-4 to update the employer about changes to be made to the withholding.
The bottom line
The W-4 form helps employees to estimate their tax withholding accurately. Form W-2, on the other hand, allows employers to inform the IRS about wage payments and the sums that have been withheld towards federal income taxes. Both forms play a vital role in the country’s tax system.