W-2 vs W-4 remains a long-standing debate among the working class when it comes to understanding tax forms. Astonishingly, according to the tax policy centre, fewer Americans owed no federal income tax in 2020, and the percentage is estimated to go higher.
Whether you are an employer or employee, both tax forms are relevant to your financial records. Also, they are essential for filing with the IRS. As a result, filling out tax forms can be pretty challenging, especially when you do not understand their implication.
However, you do not have to be a tax expert, or IRS personnel to understand the difference between these easily misplaced forms. In this article, we will cover all you need to know concerning forms w-2 vs w-4, what they are, their uses, and their relevance. You will also learn why you should know the difference between the two forms. So, read on to learn more!
What is a w-2 Form?
A w-2 form is a document the IRS issues on employee income and tax withholdings. It is also known as the wage and tax statement. The reason is that the w-2 relates how much you earn with how much you pay as your tax bill. It is a form that gives valid information concerning how much money your employer pays you and how much he withholds as tax from your gross pay. As a result, the w-2 is an employment relationship form. So, it explains a worker’s earnings– which is why it is a vital document when filing federal and state taxes.
What is a w-4?
While the w-2 form moves from the employer to the employee, the w-4 form moves from the employee to the employer. Essentially, the w-4 form is akin to being the opposite of the w-2 form. It is the form w-4 that tells your employer how much to withhold from your pay per tax season. As a result, you should always update your form w-4 every time there is a change to your financial situation. That way, your employer knows exactly how much to withhold without keeping much cash away from you.
W-2 vs W-4: what is the difference?
The fundamental difference between forms w-2 vs w-4 is the information both forms carry and who completes either of them. The form w-2 reports your gross earning alongside tax and other withholdings like social security, medicals, retirement, etc. In comparison, the form w-4 gives your employer accurate information on how much to withhold from your paycheck. In order words, while the business owner is responsible for the form w-2, the worker is responsible for the form w-4.
W-2 vs W-4: when is it right to file?
Knowing when to file both tax forms is vital for both the business owner and workers. Since the form w-4 gives your employer information on how much money to withhold for income taxes, you should as the employee, fill out your form w-4 at the start of a new job. Additionally, you should make updates to your form w-4 when there are new changes to your finances. Examples include marriage, having a baby, going through a divorce, or moving.
Ideally, the IRS recommends filling out a form w-4 every year. This way, you are sure of paying the right amount on taxes. However, if your income and taxes are pretty stable, then you may not need to bother with the yearly form w-4 filing.
In addition, employers are responsible for completing W-2 forms for their workers, at least by the 31st of January, every year. The reason is that each filing gives details for tax withholdings of the previous year. For example, if a business owner, completed a W-2 form for an employee on the 31st of January, 2021, it means that the form reflects the tax information and payroll from the year 2020. It is pretty different from dealing with self-employment taxes and having to be issued 1099 forms from your clients.
Even though W-2 and W-4 forms are both IRS tax forms, they are completely different from each other. Also, they are completed and filled differently, by different people and for different occasions. Therefore an understanding of forms w-2 vs w-4 will keep you from inadvertently incurring tax debt and having tax inconsistencies.
FAQS: Why should you accurately fill a form w-4?
Why should you accurately fill a form w-4?
If you do not want to have a huge balance during tax season, you should accurately complete a form w-4. That way, you can have more cash at hand because you are not overpaying on taxes. Also, it gives your employer accurate information concerning your due withholdings per time.
What happens if you adjust your form w-4 without having enough withholdings on federal income tax?
If less than the accurate amount is withheld on your income taxes, that puts you in debt when filing your next tax return. Also, you may get an underpayment penalty. The reason is that your form w-4 is essential for ensuring that your employer withholds the right amount of money for your taxes. However, you usually will get a refund to balance it up if your withholdings are too much.
What happens if I forget to file a form w-2?
Filing form w-2 and other tax forms are essential to proper financial management, especially with the government. If you forget to file a form w-2, you will receive a return provided you do not owe additional tax. However, if you owe additional tax, you will require filing an amendment and offset the tax debt by 15th April, to avoid receiving late penalty charges.
Do independent contractors and the self-employed require a form w-2?
Independent contractors and the self-employed do not require a w-2 form. Instead, they require that their clients issue them 1099 forms. It also covers transactions with business associates. Additionally, 1099 forms are also relevant for situations where you give/pay over $600 within the year. Examples include but are not limited to rents and special services.