As tax season approaches, many employees find themselves confused about the various tax forms they encounter throughout the year. Don’t worry if you’re in this position, you aren’t alone. Two of the most common tax forms — and frequently confused — are the W-2 and W-4.
In this blog post, our team at Lewis CPA will explain the key differences between these forms and how they impact your tax obligations to ease your tax preparation process.
What Is Form W-2?
Form W-2, also known as the Wage and Tax Statement, reports an employee's earnings and the taxes withheld from their employee's paycheck during the tax year. It summarizes an employee’s wages, salaries, tips, other compensation, and the taxes withheld for federal income tax, social security, and Medicare.
Form W-2 summarizes your earnings and taxes withheld, but the information is generated after the fact. You don't have immediate control over how much tax is withheld until you file a new W-4 form.
Who Files?
Unlike the W-4, the W-2 is not completed by the employee. Employers fill out W-2 forms for their employees annually. Companies are required to provide W-2 forms to all employees who received wages and had taxes withheld during the previous tax year.
It's important to note that independent contractors do not receive W-2 forms. Instead, an independent contractor fills out a W-9 form (providing their taxpayer identification number) and receives a 1099 form reporting their earned income for the year.
How to File
Employers are responsible for preparing and distributing W-2 forms to their employees by January 31st, following the end of the tax year. Employers must also file copies of these forms with the Social Security Administration, which then shares the information with the Internal Revenue Service and state and local governments for tax administration purposes.
As an employee, you don't "file" the W-2 itself, but you'll use the information from your W-2 when preparing your tax return. The data from your W-2 is essential for determining whether you owe additional taxes or are due a tax refund.
What Is Form W-4?
Form W-4, the Employee's Withholding Allowance Certificate, is used by employees to tell their employer how much federal income tax to withhold from their employee's pay during each pay period. The tax withholding amount is based on factors like filing status, withholding allowances, tax credits (such as the child tax credit or student loan interest deduction), and other relevant information.
Form W-4 allows you to control your tax withholding, which can potentially lead to a larger tax refund. It allows you to claim various tax credits or deductions. When filed correctly, it can minimize the need for adjustments in your tax return. However, when filed incorrectly, it can result in too much or too little tax being withheld, potentially leading to owing a significant tax bill or receiving a smaller-than-expected refund.
Who Files?
Every employee fills out a W-4 form as part of their new hire paperwork. This is typically one of the first documents you'll complete when starting a new job. Additionally, employees should update their W-4 whenever they experience a significant life change that could affect their tax situation, such as:
- Getting married or divorced (changing marital status)
- Having a child (potentially qualifying for the child tax credit)
- Taking on a second job
- A spouse starting or stopping work
- Significant changes in income
- Changes that affect tax credits or deductions
How to File
The process for completing a W-4 form was significantly revised in 2020. The current form no longer uses the concept of "withholding allowances" that appeared in earlier versions. Instead, it uses a more straightforward approach with five steps:
- Enter your personal information (name, address, social security number, and filing status).
- Account for multiple jobs or a working spouse.
- Claim dependents (which may qualify you for the child tax credit).
- Make other adjustments (additional income, deductions, or extra withholding).
- Sign and date the form.
If you need guidance, the IRS website offers a tax withholding estimator tool that can help you determine how to complete your W-4 accurately. Many payroll systems also offer digital versions of the W-4 that employees can access and update as needed.
Comparing the W-2 Form vs. the W-4 Form
While both W-2 and W-4 are essential for tax compliance, they serve distinct purposes. We’ve put together the following table that highlights the key differences between these two vital forms.
In essence, the W-4 dictates your withholding throughout the year, while the W-2 summarizes your annual earnings and taxes for filing purposes. Despite all of this information, we know tax-related topics can still be confusing. At Lewis.cpa, our experienced accountants offer personalized tax guidance and assistance with these forms or any other tax-related inquiries.
The Interconnection Between W-2 and W-4
While the W-2 and W-4 serve different purposes, they're closely connected in the tax system. In other words, the information you provide on your W-4 directly influences the amounts that will eventually appear on your W-2.
If you notice that your W-2 shows too much or too little tax being withheld, you can adjust your W-4 to change your withholding for the future. This interconnected system allows for ongoing adjustments to help you achieve your preferred tax outcome.
Lewis.cpa: We Make Tax Preparation Easier!
Think of the W-4 form as your tool for controlling how much tax is withheld from your paychecks throughout the year, while the W-2 form is your annual record of earnings and withholdings that you'll use when filing your tax return. By properly managing both forms, you can avoid surprises during tax season and optimize your tax situation to align with your financial goals.
Contact Lewis.cpa today if you have any questions. We have decades of experience helping individuals and businesses navigate their tax needs. We’re here to help you make informed decisions about your tax withholdings!
