Form W-2 and Form W-4 – Key Differences

January 29, 2024 by Joe Grimes

two coworkers discussing i-9 compliance

Various IRS tax forms are used by employees and employers for tax purposes and it can be difficult to remember the differences between them and their uses. However, making a distinction between forms such as Form W-2 and Form W-4 as well as fully understanding who is responsible for completing them and when is an important part of improving payroll tax compliance.

Form W-2 and Form W-4 are federally required IRS tax forms, but Form W-4 is completed by employees and used by employers to calculate how much income tax to withhold. On the other hand, the purpose of Form W-2 is to report employee pay over the past year and how much tax was withheld.

Form W-2 and Form W-4 Compared

Understanding the differences between Form W-4 and W-2 starts with the basics. Form W-4 is an input document and the W-2 is an output document. Employees, usually new hires, use Form W-4 to provide their company’s payroll department with information on how much tax to withhold from their earned income. Based on this, at the end of every year, employers use Form W-2 to report an employee’s annual income and taxes withheld.

What Is Form W-4

Form W-4, also known as the Employee’s Withholding Certificate, is provided by the employer once an employee has accepted an offer of employment. New hires need to complete and submit this form before receiving their first payment. Apart from them, existing employees with life and work changes that may affect their taxes, such as marriage, divorce, a new baby or dependent, and having more than one job, also must complete a new Form W-4.

Using the information on the Form W-4, employers determine how much federal, state, and local taxes to deduct from the employee’s paycheck. In addition, they should keep a copy of the signed Form W-4 in case the IRS requests it.

If newly hired employees fail to complete Form W-4 before their first payment, the company should process payroll as if they had chosen a single civil status with zero children or dependents. Employers can also use their employees’ Form W-4 from the previous year as the basis for calculating how much tax to withhold. Also, in the event employees expect their wages to result in zero tax liability, they can claim Form W-4 exemption.

State-Specific Form W-4

Several states, such as Colorado, Minnesota, and Mississippi, use federal Form W-4 to determine state tax withholding. Most other states have their own versions of Form W-4 some of which were released only in recent years. Therefore, it is important to check for both federal and state Form W-4 updates on an annual basis.

State Form W-4 functions similarly to the federal version, but there are some differences. For example, most employees need to complete a federal Form W-4, but not everyone needs to complete a state Form W-4. In addition, a federal Form W-4 provides employers with information on how much federalincome tax to withhold from each employee’s pay. A state Form W-4 tells them how much stateincome tax to withhold.

What Is Form W-2

Officially known as IRS Wage and Tax Statement, Form W-2 is a year-end tax document that contains information about the employee, their earnings and any deductions taken for taxes, savings, retirement, and childcare.

The prior year’s Form W-2 must be sent to the IRS and employees by January 31. Employers must fill out, file and distribute this form for every employee they paid at least $600 during the prior tax year, even if they no longer work for them at the time of filing.

Differences Between Form W-2 and Form W-4

Form W-2 and Form W-4 are related but also used for different purposes. Here are some of the key distinctions between them:

  • Employees fill out Form W-4 while employers fill out Form W-2;
  • Form W-4 informs employers on how much to withhold from an employee’s paycheck while Form W-2 is a statement of compensation paid and taxes withheld throughout a calendar year;
  • Employees fill out Form W-4 upon hiring and anytime their withholding changes while employers fill out Form W-2 for each tax year and file and distribute it by January 31 of the following year; and
  • Employers keep Forms W-4 but do not typically have to file it with a tax agency while they file Forms W-2 with the Social Security Administration and distribute a copy to their employees.

Understanding the Purpose of Form W-2 and Form W-4

Payroll taxes can quickly get complicated, given that employers must calculate the withholding, do the necessary record keeping and fill out the required forms. In addition to this, there are different IRS documents to learn about that can make the entire process overwhelming.

Form W-2 and Form W-4 are both created by the IRS and relate to taxes but each serves its own purpose. Form W-4 is used to gather employee information, while Form W-2 is provided at year-end so that employees can file their taxes.

Both forms are relatively simple in most cases, but some circumstances, such as employee benefits or tips, might add complexity. The easiest and most accurate way to handle Form W-2 and Form W-4 is to automate payroll tax management. As a result, employers can ensure that both forms are completed correctly and within the appropriate time frame as dictated by the IRS while eliminating errors that can hurt both them and their employees.

Automate payroll tax management to ensure compliance, enhance form processing, and stay in line with all the necessary tax form requirements.

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