W-2 vs W-4: What is The Difference? (2024)

In the corporate world, the W-2 and W-4 are some of the most frequently used tax forms among employees and employers to keep track of payroll taxes. Although paramount for tax compliance, navigating these forms without adequate information can put you at a disadvantage. Unfortunately, seemingly small mistakes can attract steep penalties from government agencies and legal issues, leaving you with extra costs in fines and disgruntled staff.

While they appear complex, these forms are straightforward, with distinct uses and processes. Employees fill out W-4 forms to supply the necessary information for proper tax deductions, and employers file the W-2 forms to state employees’ deducted or withheld taxes.

Understanding these documents and where to use them can ease your payroll and tax processes, making for an overall smoother business. Read on to discover the differences between W-2 and W-4 forms, when to use them and bonus tips for seamless management.

What Is a W-2 Form?

An Internal Revenue Service (IRS) W-2 form is a document filed by employers detailing the summary of an employee’s total income and tax withholdings for federal and state income tax for the past year. There are no local, city or county taxes captured in a W-2. Also known as the Wage and Tax Statement, employers submit this document to the Social Security Administration (SSA) on behalf of all employed salary earners. Irrespective of the employee’s relationship with the employer, this document is required if the employee earns at least $600, including non-cash remuneration.

Besides the SSA, employers also issue W-2 forms to the respective employees, as they are essential for income tax reporting and filing. However, this circulation must be done on or before January 31 to give employees ample time to organize their income tax reports. Most organizations disseminate the W-2 form to their workers through human resources or payroll departments.

So, what makes up the W-2? In addition to the employee’s income statement and withheld taxes, providing a comprehensive overview of an employee’s wages, other information found in this document includes:

• Employer’s name and address
• Employee’s name and address
• Employee’s Social Security number
• Company’s Employer Identification Number (EIN)
• Employer’s State ID number

What Is a W-4 Form?

A newly hired employee fills out an IRS W-4 form to supply the data employers require to accurately determine the employee’s tax liability and the amount to withhold in taxes. Also called an Employee’s Withholding Allowance Certificate, this form notifies the organization of the details needed to calculate their tax deductions correctly. Employees can claim allowances determined by the information given, which generally leads to fewer deductions. Employees may also claim fewer allowances, creating a situation where they would receive a larger tax refund.

Key components of the W-4 include the employee’s contact information, details about other jobs currently handled, marital status and dependents. It’s important to update this form to reflect significant life events or changes accurately.

For example, the birth of a child enables the employee to claim dependent allowances on that child. Failure to update the W-4 after this birth may lead to an overcharge.

Key Differences Between W-2 and W-4 Forms

Above, we’ve introduced the meaning and purpose of both forms. Now, we’ll consider the differences between W-2 and W-4 tax forms.

Firstly, the W-4 guides employers in discerning how much tax to withhold from employees’ incomes during the year. In contrast, the W-2 enables efficient employee tax filing, as it is a year-end tax document necessary for filing income tax statements. Despite being distinct, separate documents, both forms work together and must be completed carefully for smooth tax filing on the employer’s and employee’s ends. Mishandling either of these forms may result in poor tax filing and reporting for the organization and the employee, inaccurate financial records and possible fines.

Moreover, these forms are filed in different instances. The W-2 is filed at the end of a tax year, usually in January, while employees fill the W-4 to coincide with major life changes, such as a new job, marriage or childbirth.

Here are some distinguishing factors of both documents.

Who Needs To File a W-2 and W-4 Form?

Generally, all employees complete the W-4, but certain classes of workers are an exception and interact with these forms uniquely. In this section, we’ll look at these exceptions and how they differ from the norm.

Some workers do not require a W-4. The IRS recognizes several classes of employees, and the employee’s contract type dictates the required tax form. W-2 employees or salary earners fill out W-4 forms, but independent contractors or freelancers fill out the W-9 form.

As an employer or business owner, you do not have to complete and circulate a W-2 to hired contractors. The IRS provides the 1099 tax form, which is like the W-2 but only for contractors. Like the W-2, the 1099 must be provided to the independent contractor on or before January 31 and submitted to federal and state tax agencies.

How To Fill Out W-2 and W-4 Forms

After understanding the basics of these vital documents, it’s time to learn how to fill them. As we’ve already established, minor errors in completing these documents can lead to major mishaps. Read on for a step-by-step guide to filling out W-2 and W-4 forms. Current revisions of all forms are on the IRS website. However, you cannot print and file downloaded W-2 copies.

How To Fill W-2 Forms

You can fill your W-2 manually or automatically with the help of recommended payroll software. The W-2 form has boxes labeled A to F and 1 to 20. Follow the steps below to complete it.

1. Fill out sections A to F with the corresponding information. These include the employee’s name, address, Social Security number, business control number and the employer’s name, address and EIN. Also, you can leave boxes blank if your business doesn’t use control numbers.
2. Next, input the employee’s taxable income for the year in Box 1.
3. Box 2 contains the total tax withheld and remitted.
4. In Box 3, enter the employee’s Social Security wages. Note that this amount must not exceed the annual Social Security wage base.
5. Box 4 reports the total Social Security tax, which is a standard 6.2% of the amount in Box 3.
6. In Box 5, report the employee’s Medicare wages and tips. While this value typically equals the Social Security wages, there is no wage base for Medicare, so it can also be higher.
7. Input the employee’s Medicare tax in Box 6, which is 1.45% of Box 5.
8. Next, enter any Social Security tips in Box 7. Note that the sum of these tips and the Social Security wages must not exceed the wage base. Then, indicate any allocated tips in Box 8.
9. Box 9 should be left empty.
10. Box 10 contains dependent care benefits.
11. Next, report non-qualified plans in Box 11.
12. Certain codes called W-2 Box 12 codes may apply depending on the employee. Input the code and the corresponding amount in Box 12.
13. Box 13 contains three checkboxes: statutory employees, retirement plan and third-party sick pay. Check the necessary boxes, referencing the applicable Box 12 code.
14. In Box 14, enter other miscellaneous payments.
15. Next, enter your state abbreviation and state ID number in Box 15.
16. Lastly, fill in your locality name, state and local wages, tips and deducted taxes in Box 16 to 20 if applicable.

Note that the IRS mandates that companies filing over 10 W-2 or 1099 forms must file them electronically. Also, employers should file W-2 and 1099 forms on or before January 31.

How To Fill W-4 Forms

W-4 forms are usually part of the mandatory paperwork new employees fill out during onboarding processes. A new employee should follow these steps to complete a W-4.

1. First, enter personal details like name, employee address and Social Security number.
2. Indicate filing status.
3. Next, enter information about any other income sources available. If none, then skip this section.
4. Next comes the dependents section, which awards a Child Tax Credit to anyone with less than $200,000 in income (or $400,000 for joint filing). Enter number of children and multiply by the stated credit amount.
5. Use the Deductions, Adjustments and Additional Income worksheet if you have deductions or additional income or want to adjust your withholding further.
6. Finally, include signature and date of completion.

Filling 1099 Forms

Filling out 1099-NEC forms is similar to completing the W-2.

1. Business information, including the company’s name, address and EIN
2. Contractor’s Name and Address
3. Contractor’s Tax Identification Number (TIN)
4. Payment amounts, i.e. non-employee compensation paid, located in Box 1
5. Tax withheld entered in Box 4
6. Box 2 reports direct sales of consumer goods greater than or equal to $5,000

Avoiding Common W-2 and W-4 Mistakes and Penalties

Errors in W-2 and W-4 forms are common but can cause substantial damage. Knowing these common errors is essential so they can be identified and prevented. Here, we’ll discuss commonly made W-2 and W-4 mistakes, associated penalties and tips for avoiding them.

1. Incorrect Personal Information

All tax forms, including the W-2, W-4 and 1099, require personal information like names, addresses, SSNs, EINs and TINs. These are primary identifiers, and mistakes prevent you from being recognized. Errors in these details can cause filing delays and may subject you to penalties if not corrected before the given deadline.

To avoid this problem, carefully review tax documents before submitting or using them. Always use official names, check for correct spellings and titles and review numbers to ensure accuracy. For the 1099, always collect personal data from the hired contractor early.

2. Wrong Figures

Besides personal information, tax forms also have sections for income statements or deduction calculations. Errors in these figures, especially calculated figures, translate to false reports and poor filing, which can attract fines and audits.

Always cross-check figures and recalculate where necessary to ensure your figures are accurate. If you are confused, especially with standard percentages, consult tax professionals or the IRS website.

3. Unsigned Forms

Any tax form without a signature is invalid and will not be accepted. Like math errors or incorrect information, filing without a signature will cause delays and possible fines if the form’s deadline expires. Check signatures on each form. If joint filing, make sure there are signatures for both parties.

4. Failure to Meet Deadlines

Although the W-4 doesn’t have deadlines, the W-2 and 1099 must be issued to the employee and submitted on or before January 31. Extending this time affects the employee and leaves them unable to prepare their tax statements. Also, late submissions may be fined depending on the number of forms submitted and how late they are submitted.

5. Reusing Leftover Forms

The IRS always makes new versions of the W-2 each year, so ensure you use the correct form to report your employees’ taxes. The year is on the tax forms, so submissions on leftover forms from the previous year will not be accepted. Ensure you purchase the required form for the tax year you’re reporting, i.e., a 2023 form if you’re reporting in January 2024.

Tips for Small Businesses

Large-scale businesses have the capital to employ expensive firms for tax filing and reporting, but small businesses usually do not have this luxury. How can they best utilize their resources to manage tax documents effectively for excellent operations? Here are some tips and best practices for filing W-2, W-4 and 1099 forms as a small business owner.

1. Early Preparation

Begin preparations for documents with stated deadlines, like the W-2 and 1099, as soon as possible.

Collect the required information on time and begin your calculations long before the January 31 due date. This way, you can avoid last-minute problems, beat the deadline and avoid late penalties.

2. Educate and Update Yourself and Your Staff

Fiscal policies tend to be revisited and reviewed, so always check the IRS website to ensure you have current information. Ensure you use the latest revisions of all tax forms and study official guides and notes.

Also, educate employees and provide clear instructions for filling out these forms, especially with the W-4. Doing this reduces the likelihood of errors that may arise from ignorance.

3. Embrace Technology

Technology is a fast-moving train in several industries, including taxation and tax filing. Automating payroll processes with software can significantly lessen your workload while reducing the chances of errors arising from manual handling. Additionally, you can employ internal websites to make W-4 forms more accessible to employees or circulate W-2s and 1099s.

4. Outsource

With a limited budget, outsourcing tax filing to professionals may save you time and money in the long run. Mistakes are less likely with professional guidance, and a professional can quickly resolve complications or complexities.

You can hire full-time HR or payroll personnel or request Professional Employer Organizations (PEOs) depending on available funds.

Additional Tax Resources

In addition to tax professionals, you can utilize the wide range of resources the IRS supplies on W-2, W-4 and 1099 compliance. Perusing these instructions can keep you updated and abreast of tax rules and the nuances of tax documents. You can also use the IRS Withholding Estimator to determine appropriate withholding amounts and prevent mistakes.

The Bottom Line

Accurate tax reporting is essential for any business to function and operate at its best. Understanding the nuances of W-2 and W-4 forms, what they are and how to file them is key to tax reporting. Keep learning to maintain a stellar tax filing system and consult a professional for any further concerns.