W2 vs W4: I will start by saying that a W-4 is an IRS form that an employer uses to gather tax withholding information for an employee. While a W-2 is a year-end tax document that’s required by the IRS and used to report an employee’s annual income and taxes. I’ll compare both in detail and walk you through when and how to use each of them in this post. Only keep reading.
W-2 vs W-4: The Basic things you need to know
I would further bring a little insight on the major difference between form W-2 and W-4 at this point. But then you need to know that a W-2 is the employer generated document that notifies both the taxing authority and the employee of the amount earned, amount taxable, State and Federal Taxes withheld, FICA withheld, etc.
On the other hand, a W-4 is the employee-generated form that advised the employer on what taxes to withhold from an employee’s earnings.
Who fills out the form?
The W-4 is all about input—the employee telling you what to do with their withholdings. The W-2 is all about the output—telling the IRS what’s been done in the previous year. Form W-2 is one of the most common forms small business owners are required to submit, while every employee needs to file a W-4.
In other words, form W-4 is filled by employees while form W-2 is filled by the employer and submitted to the IRS at the end of every year. More so, it’s required that the employers give a copy of the W-2 to the employees.
The gist is that even if you did not collect any income, Social Security or Medicare tax from employees. In the end, you would still need to submit a W-2 for each employee you paid $600 or more.
Why do you need the forms?
First, the W-4 form indicates how much should be withheld from each employee’s paycheck and submitted to the IRS. Thus, the amount would depend on factors such as the employee’s marital status, the number of dependents, and personal withholding preference.
While the W-2 form shows the year-end reports of an individual employee’s earnings. Including gross pay, tips, and bonuses.
As well as their federal tax contributions, encompassing Social Security and Medicare taxes. Furthermore, any additional withholdings, such as contributions to retirement plans, would also appear on the W-2.
When is it submitted?
The W-4 form is submitted when the new employee begins work. But an employee can still fill a W-4 form in the long run.
So, if the financial status of the employee changed or if they need to withhold more or less from their paycheck. Thus, employers should use the W-4 to gather employee information and calculate how much tax to withhold from employee paychecks.
On the other hand, Employers submit the W-2 form to the IRS and employees by January 31 of the following year to report wages and taxes withheld.
How Do I fill the forms?
The IRS rolled out a new version of Form W-4 in 2020.25 It is the first major revamp of the form since the Tax Cuts and Jobs Act (TCAJ) was signed in Dec. 2017. TCAJ made major changes to withholding for employees.
In fact, the W-4 revamp and the tax changes since the TCAJ may be a reason to look again at the W-4 you filed back when you first came to your employer and see if you need to make changes.
Another reason to re-look at your W-4: What you learn when you file your current income tax forms, especially if you discover that you didn’t have enough withheld and you owe money to the IRS.
The 2020 version of the W-4 form eliminates the ability to claim personal allowances. Previously, a W-4 came with a Personal Allowances Worksheet to help you figure out how many allowances to claim.
Thus, the more allowances you claimed, the less an employer would withhold from your paycheck and the fewer you claimed, the more your employer would withhold. (Although the standard deduction nearly doubled with the TCJA, it eliminated personal and dependent exemptions.)
W2 vs W4 – Steps for filing a W-2 or W-4
I will take you through a five-step process that will help you in completing the W-2 and W-4 forms.
Step 1: Provide Your Information
Provide your name, address, filing status. And the Social Security number. Easy. Your employer needs your Social Security number so that when it sends the money. It has withheld from your paycheck to the IRS, they apply the payment toward your annual income tax bill.
After completing this step single filers with a simple tax situation, as described above, only need to sign and date the form.
Everyone else will have to take a few more steps. If you don’t submit Form W-4 at all, the IRS requires your employer to withhold at the highest rate.
Step 2: If You Have Multiple Jobs or a Working Spouse
Proceed to step two if you have more than one job or your filing status is married filing jointly and your spouse works. If this applies to you, you have three options from which you can choose one:
Use the IRS’ online Tax Withholding Estimator and include the estimate in step four (explained below) when applicable.5
Fill out the Multiple Jobs Worksheet, which is available on page three of Form W-4. And enter the result in step 4(c), which I explain below. They provide it on page three of Form W-4, which your employer should have given to you. Or you can download it from the IRS.
The IRS advises that the worksheet should only be completed on one W-4 form. And the user should enter the result for the highest paying job, only to end up with the most accurate withholding.
W-4 Multiple Jobs Worksheet
Check the box in option C if there are only two jobs total. And do the same on the W-4 for the other job, too. Choosing this option makes sense if both jobs have similar pay. They may withhold otherwise more tax than necessary.
Step 3: If You Have Dependents
If you have dependents, fill out step three to determine your eligibility for the Child Tax Credit and credit for other dependents. Single taxpayers who make $200,000 or those married filing jointly who make less than $400,000 are eligible for the Child Tax Credit.
Technically, the IRS definition of a dependent is pretty complicated, but the short answer is that it’s a qualifying child. Or a qualifying relative who lives with you and whom you support financially.
Multiply the number of qualifying children under age 17 by $2,000 and the number of other dependents by $500. Add the dollar sum of the two to line three.12
Step 4: Other Adjustments
In this section, the IRS wants to know if you want an additional amount withheld from your paycheck. “Of course not. You’re taking enough of my money already,” you think.
But the information you’ve provided in the previous sections might cause your employer withholding too little tax over the course of the year.
If they withhold too little, you will end up with a big tax bill. And possibly underpayment penalties and interest in April. In that case, tell your employer to withhold extra money from each paycheck so that it doesn’t happen.
How do you know if this might happen? One likely cause is if you receive significant income reported on Form 1099, which they may use for interest, dividends. Or self-employment income—they withhold no income tax from these sources of income.
You may also need to use this section if you’re still working. But receive pension benefits from a previous job or Social Security retirement benefits.
Step four of a W-4 allows you to have additional amounts withheld by filling out one or more of the following three sections:
If you expect to earn “non-job” income not subject to withholding, such as from dividends. Or retirement accounts, enter the amount in this section.
Fill out this section if you expect to claim deductions (such as itemized deductions) other than the standard deduction. And want to reduce your withholding. To estimate your 2020 deductions, use the Deductions Worksheet provided on page three of the W-4 form.
W-4 Deductions Worksheet
This section allows you to have any additional tax you want to withhold from your pay each pay period. Including any amounts from the Multiple Jobs Worksheet if this applies to you.5
Step 5: Sign and Date Form
While signing and dating a W-4 is the easiest step, it is no less important than any other. The form says, “Under penalties of perjury, I declare that I have examined this certificate. And, to the best of my knowledge and belief, it is true, correct, and complete.” You have to sign your name below that statement, where it says, “Employee’s signature.” Then enter the date to the right. It’s not valid until you do.
In the End
The difference between the two payroll forms is that a W-4 is an input document and a W-2 is an output document. An employee uses a W-4 to inform the company’s payroll department how much tax to withhold from their earned income. Then, at year-end, a W-2 reports year-end earnings and deductions. I think I have done justice by showing you what you need to know about form W-2 and W-4.
It’s important to fill out a W-4 form correctly because the IRS requires people to pay taxes on their income gradually throughout the year. If you have too little tax withheld, you could owe a large sum to the IRS in April, plus interest and penalties for underpaying your taxes during the year.
At the same time, if you have too much tax withheld, your monthly budget will be tighter than it needs to be. Also, you’ll be giving the government an interest-free loan when you could save or investing that extra money and earning a return. And you won’t get your overpaid taxes back until the following April when you file your tax return and get a refund.