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 implications.
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.
The IRS W-2 form, commonly known as a Wage and Tax Statement, is a summary of your wages and the tax that your employer has withheld. Each year at the conclusion of the calendar year, employers send out W-2 vs W-4 forms to employees to record their earnings for tax purposes. In addition to the periodic taxes withheld from employees’ paychecks throughout the year, such as federal income taxes, social security, Medicare, and state taxes, the employer also fills out these forms with information about the employee’s salaries, tips, and bonuses. The employer also pays for additional compensation, such as retirement benefits, on behalf of the employee.
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.
An Internal Revenue Service (IRS) document known as a W-4, also known as an Employee’s Withholding Allowance Certificate, is used to report information such as marital status, social security number, and home address. When you are hired by a corporation, you are given a W-4. You can declare household-specific standard deductions on this form, such as your marital status, the number of dependents you have, and your tax exemptions.
Your W-4 form answers directly affect how much your employer withholds from each paycheck to cover state and federal taxes. You can either pay more per paycheck and pay less at the end of the year, or you can pay less per paycheck and pay more.
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.
Advice on completing W-4 forms
Here are some pointers for completing a W-4 if you’re beginning a new job:
Make the proper withholding determination
Depending on the most recent IRS laws, there may be different tax withholding practices. At the start of any work arrangement, it is important to carefully review filing requirements and applicable tax laws to make sure your employer is deducting the appropriate amount of taxes from each paycheck. At the end of the year, you can get a tax refund if you withhold too much, or you might owe money in taxes if you withhold too little. To determine the appropriate tax withholding amount for you, think about utilizing the IRS tax withholding calculator.
Check your W-4 math twice
Making sure your W-4 is accurate could help you avoid having to file changes or adjust your tax withholdings in the future. When you begin a new employment, carefully reviewing your W-4 can ultimately save time and work. Additionally, you can avoid unforeseen tax obligations that could harm your financial plan.
Think about tax season
Your financial situation may determine whether you would like to get a tax refund. If so, you can request that more taxes be deducted from your salary all year long. When filling out the paperwork for your new job, you can include this information on your W-4. Before completing your W-4, you might want to talk about the specifics of your situation with a tax expert.
Guidelines for deciphering W-2 forms
The following advice might help you analyze your W-2 form when you file your taxes:
Review the details that were reported in W-2
Since the majority of businesses closely monitor their records throughout the year, W-2 forms typically contain accurate information. Correcting a W-2 as soon as possible might speed up the tax procedure if it contains a mistake that the employer can readily fix, like a misspelled word. When there is a considerable discrepancy between the totals on your pay stub and your W-2 for reported earnings, you may need to ask your employer for clarification or contact the IRS. You can still utilize the W-2 in its current format when preparing your tax returns even if your address is outdated or wrong.
Keep a copy
A number of copies of that document may be included in the packet you receive with your W-2 forms. You can save one copy of your W-2 for your records if you’re employing a third-party tax preparation service to finish your taxes. To ensure the security of your personal information, save electronic copies of your documents in a safe place, like an encrypted hard drive.
Think about your withholdings
You might discover that your tax obligation is different from what you anticipated when completing your W-4 vs W-2 when you receive them at the end of the year. Throughout the year, verify the correctness of your tax withholding on your pay stubs. If it does differ, you can use this knowledge to modify your withholding in the future.
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.
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.