whats the difference between a w2 and w4

Saturday, January 03, 2015

Building clarity with tax forms used for employee pay

As part of operating a business, business owners are required to complete and report specific forms to the Internal Revenue Services (IRS). Some of the major IRS forms that exist are to help the IRS know how much income an employee makes, the tax deductions relevant for each employee (for example, standard deductions that are reported), and the amount of taxes that are withheld for each employee. Two of the most common forms are the IRS form W-4, where employees tell their employer how much tax to deduct from their income. The IRS form W-2 is completed by the employer and includes gross pay and income tax information.

This article will discuss the purposes of each form and the information reported on each document. Additionally, this article will outline the similarities between the W-2 vs. W-4 and what happens with the forms over time. The article aims to help small business owners gain more knowledge on these forms so that tax filing and tax documents can be a bit easier to understand.

What is a W-2?

W-2 is technically called the IRS Form W-2 and can be found on the IRS website. The W-2 is filed with the IRS by the employer. Employers create this document annually to show information related to an employee’s paycheck. As such, information about deductions, tax withholdings, Social Security contributions, and Medicare taxes are included on this form. The W-2 is then issued to the employee so that they can file their tax returns. Thus, businesses are required to make this form available to their teams by the end of a tax year (typically on January 31st).

IRS tax forms, like the W-2, include major sections that help the IRS determine if the employee would be eligible for a tax refund or if the taxpayer will need to make a payment for owed amounts. The major sections of this form include employer identifying information (such as the employer identification number), wages, tips, overall earnings, Social Security/Medicare payroll taxes paid, federal income tax paid, state income tax paid, local income tax paid, and retirement contributions paid.

What is a W-4?

The employee's withholding allowance certificate tells employers how much income tax should be withheld from the employee's paycheck. The W-4 is technically called the IRS form W-4, which is the employee's withholding certificate. Unlike the W-2, employees complete the W-4 form when they are a new employee or a new hire. Typically, this takes place during onboarding.

Sections on the form include information about your marital status, dependents, and withholding allowances. Typically, an employee's tax rate will be less if they are married and have dependents, like children. This information will help determine your rate for federal income tax so that the accurate amount is withheld every payroll period. The W-4 form can also tell an employer if the employee wants to withhold additional amounts from their paycheck. Moreover, W-4 forms can be resubmitted or updated when life situations may shift or change. For example, withholding allowances may shift if you get divorced or have a child. Additionally, your withholding amounts may decrease if you make estimated tax payments or are eligible for tax credits.

What is similar about the W-2 and W-4 forms?

There are three primary similarities between the W-2 and W-4 forms. For one, they both are designed by and come from the IRS. Thus, whether you manage a large-scale business or take part in self-employment, all business types are working with similar forms. The other similarity is that both forms are a critical part of reports on business and employee taxes. For accurate payroll taxes, these forms must be completed, updated, and reported with great attention to detail. The last commonality these forms share is that they are applicable only to employees at a company. If a team member is designated as an independent contractor, they will use alternative forms, such as the 1099-MISC or the W-9, when reporting tax related data or information.

What is different about the W-2 and W-4 forms?

Who fills out the form

As discussed, the W-4 form is filled out by the employee when they are starting a new job or whenever they want to change their withholding amounts. In that case, a new W-4 form would be completed. A W-2 is filled out for the employee and is generated from data from their entire year of pay, taxes, and withholding amounts so that a tax liability can be determined.

When are the forms filled out

The W-4 form is completed upon hire (or when regular updates are needed). So, companies may be completing W-4 forms at varying times throughout the year, at onboarding and on a variable basis. The W-2 form, instead, is completed by the end of the year so it can be distributed to employees. The data on this form would be about the previous tax year.

What happens to the forms upon completion

Upon completion, the forms are processed slightly differently. Since the employee completes the W-4 form, they would submit the information directly to the employer. From there, the company’s payroll or accounting team would determine the appropriate tax withholdings for that employee based on the information provided. When the W-2 is completed, it is sent to the employee for use with their tax return. Ultimately, this information is reported in the personal tax return and reported to the IRS directly.

Applying tax form information

As you gain a better understanding of how these two tax forms are similar and different, it is important to continue to gain knowledge about how local taxes, state taxes, federal taxes, withholdings, wages, and retirement plans can impact an employee’s wage and tax statements. Some employees might have a designated number of allowances, while others may be more concerned with their payments to the Social Security Administration. As you learn the forms and tax processes better, you will be better able to support your payroll team, accounting department, and employees through the process.

Next steps

Are you ready to explore further FAQs regarding the W-4 and W-2 tax forms? Are you interested in exploring better ways to account for employee’s wages?

Heartland is ready to help.

Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us.