Small Business Tips

W-2 vs. W-4: What's the Difference Between These Forms?

Stephen Fishman
Tax expert and contributor MileIQ

There are hundreds of IRS forms, but, if your business has employees, two of the most important are Forms W-2 and W-4. Employers use these form to help follow the pay-as-you-go tax system the United States follows.  Let's go over the major difference between W-2 vs W-4.

What's the major difference between IRS W-2 vs W-4 forms?

A W-4 form is completed by the employee and used by employers to calculate how much income tax to withhold. The purpose of the W-2 form is to report how much the employee was paid over the past year and how much tax was withheld. The document is used by the IRS to determine if the employee paid the correct amount of taxes.  Employees have their income, Social Security and Medicare taxes withheld from their pay by employers. This is sent to the IRS throughout the year and when it's time for the annual return, employees will either receive a refund or a bill for the rest of the taxes they owe.

What is a W-4 used for?

Form W-4 is the Employee's Withholding Allowance Certificate. Employers use this to calculate how much income tax to withhold from the employee's pay. (It has no impact on how much Social Security or Medicare tax is withheld).  Employees must complete and sign this form on or before the day they begin a new job. New employees cannot use the same Form W-4 they filed with a prior employer. A new W-4 must be completed, even though it will usually be the same as the employee's previous W-4. The employer should keep the completed W-4 on file; it need not be filed with the IRS unless the IRS asks for it.  Form W-4 is important because it tells the employer:

     

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  • Whether to withhold income tax from the employee's pay at the single rate or lower married rate
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  • How many withholding allowances the employee claims (each allowance reduces the amount withheld)
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  • Whether the employee wants an extra amount withheld, and whether the employee claims to be exempt from withholding
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  • The employee should make the form effective with the first wage payment

If there's no completed W-4, the employer must withhold income tax as if the employee is single. This means there are no withholding allowances.  This means that the largest amount must be withheld until the employee provides a completed W-4. Form W-4 remains in effect until the employee gives the employer a new one. Yet, employees who claim to be exempt from withholding must complete a new Form W-4 each year.  If an employee's tax situation changes, they must provide the employer with a new updated W-4. It's up the employee to complete his or her W-4. Employers need not verify the allowances or withholding exemptions claimed by the employee. Employees who need help with the form can use the online IRS withholding allowance calculator.

What is a W-2 form used for?

IRS Form W-2, Wage and Tax Statement, is an information return that must be completed and filed by employers each year. It is not used to pay or withhold tax. Instead, it reports how much the employee was paid during the year and how much tax was withheld.  Every employer engaged in business must file a Form W-2 for each employee who is paid cash or non-cash compensation. There is so no matter how much pay the employee received. That is, there no minimum dollar amount that triggers this reporting obligation.  Yet, household employers generally file Form W-2 only if wages equal or exceed the payroll tax threshold for household wages ($2,000 in 2016). A W-2 must be filed even if the employee is related to you. For example, if you hire your spouse or child to work in your business.  Form W-2 is a six-part form. The employer must file a copy of with the Social Security Administration and another with the applicable state tax agency. You must send three copies of the form to the employee. Employees who file their income taxes on paper must attach a copy of the W-2 with their return. One copy should be maintained by the employer. The due date for filing is January 31 of each year.  Completing the W-2 form can be tricky because the amount of employee wages can include amounts other than cash wages. For example, such items as non-cash compensation, dependent care assistance benefits, scholarships, employer-provided group-term life insurance, certain expense arrangements, and tips.

Getting Help with Payroll Taxes

Payroll taxes can quickly get complicated. You have to calculate the withholding, do the necessary record keeping and fill out the required forms. Because of this, many small business owners rely on tax pros or accountants to do it. Remember, the amounts you pay a payroll tax service are deductible business operating expenses. You can also handle payroll and taxes yourself using accounting software.

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