With hundreds of different IRS forms, knowing which one to fill out and how can be confusing. Two important tax forms that you’ll likely come across are the W-4 and W-2 forms. If you want to know the differences between the W-4 vs W-2 and how each of them should be filled out, you’ve come to the right place! Understanding how to use these forms is a small business bookkeeping basic that can help to secure your long-term success.

W-4 vs W-2: Key Differences

The W-2 form is essentially a report of an employee’s total earnings throughout the year. This includes bonuses and the total income tax withheld for important things such as Medicare taxes, social security, pension, and employee savings accounts. The form will also report the total amount of federal income taxes that were withheld. 

On the other hand, the W-4 is a form that determines the exact amount of taxes that will need to be withheld from an employee’s paycheck. Since every employee is different, each one of these forms that are filled out will be unique. Each employee can choose to have a certain amount of taxes withheld; some will be more conservative than others.

For instance, an employee can select to have more taxes taken out for their retirement, whereas others may prefer to have more taxes taken out so that they will not owe anything to the IRS at the end of the year. In other words, think of the W-4 as a financial plan for each employee. 

When to use a W-4 vs W-2

Using W-2 vs W-4 forms differs depending on whether you are a business owner or a contractor. As a business owner, you will not personally receive either a W-2 or a W-4 form. But, if you have employees you will need to send them both forms by January 31st. If you are an independent contractor, you will instead receive a 1099 form. As a business owner that works with independent contractors, it is your responsibility to have each contractor complete the 1099. 

As mentioned, the W-4 form will determine how much should be withheld from each paycheck and will largely determine much of the information that goes into the W-2. For that reason, the W-4 should be completed and filed properly before any new employees receive their first paycheck. 

Why are W-4s needed?

Both of these forms are important to the employee, the business, and the IRS for various reasons. W-4s are a critical first step in financial planning for any person. For the business, it will let them know exactly how much to withhold from each of their employee’s paycheck. This will help businesses with budgeting and bookkeeping, and is also an effective way to prevent payroll fraud.

Finally, these forms help ensure that each year, the IRS receives federal income tax on time.

How to fill out W-2 tax forms

Who fills it out: The employer

Who it is for: The IRS and the employee

If you are an employer, you will need to file should file six copies of the W-2. One will be filed with the Social Security Administration, one with the state tax agency, and three copies will be sent to the employee.

First and foremost, to fill out the W-2 form you will need an employee social security number in addition to the employer (EIN). The form also calls for both the addresses of the employee and the business. The employee’s annual earnings will go inside of box 1. In boxes 2,4, and 6 is where you will find the information for how much federal income tax, social security, and Medicare taxes have already been paid throughout the year.

If the employee works in the service industry, you can find information for tips in this form as well. Box 3 indicates the income amount that was taxed for social security purposes. 

The yearly number of tips earned will be inside boxes 7 and 8. As for box 9, you can simply ignore this box. The government ended the pay-as-you-go option for the Earned Income Tax Credit in 2011. 

Boxes 11 through 20 are slightly more complex…let’s break them down. 

  • Box 11: the dollar amount that the employee deducted for their retirement plan or 457(b) plan. 
  • Box 12: a code that uses letters A through Z. The code will vary based on the benefits that the employee receives. 
  • Box 13: you will need to check one or more boxes that indicate employee status (see above). 
  • Box 14: place any any other deduction you received such as tuition aid or union benefits here
  • Box 15: the employer state ID number; however, you will only do this if the state you live in requires it. 
  • Box 16: the employee’s total income will be placed here
  • Boxes 17, 18, 19, and 20: the amount that’s already been withheld from state income tax, any income that is eligible for taxation, local taxes withheld, and finally, the name of the location associated with the local taxes. 

How to fill out W-4 tax forms

Who fills it out: The employee

Who it is for: The employer and the IRS

The W-4 is relatively simple to fill out. But there will be a few things that you will need to consider. First, let’s start with the easy stuff. As shown in the document above, we see that step 1 simply asks about the employee’s personal information. Name, address, social security number, and marital status. 

Step 2 only needs to be completed if the employee has more than one job or is filing jointly with their spouse. 

Similarly, step 3 will only be completed if you have dependents to claim. If you do, inside the box are basic instructions on how to calculate the deduction, per child or other dependents. 

Step 4 is where you will indicate whether you want your employer to withhold extra taxes from your income. This box is optional because if it’s not filled out, the employer will assume that a standard deduction should be taken out.

What is a standard deduction? It is simply a calculated value that ensures all taxpayers have at least a part of their incomes that is not subject to a federal income tax deduction. The deduction will vary depending on a few factors such as your marital status, age, and whether you have any disabilities.  

An employee can choose to have more or less of their taxes withheld. To put it simply, there are a few ways that you could do this. If you want more taxes taken out of each paycheck, you can add an extra amount to withhold on line 4(c). If you want less, you can reduce this number, as well as the number on line 49(a). Finally, you may also want to increase the number in line 4(b). 

Once you’re finished with the first four sections, don’t forget to date and sign inside the box on step 5. The form will not be valid without a signature! As for the last boxes at the very bottom of the page, this will be the employer’s responsibility. These sections just include basic information such as the employee identification number and their start date. 

We hope that this article helped you better understand the differences on the W2 vs W4 forms. 

Before you go, we’ve compiled a brief list of frequently asked questions. 

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Frequently Asked Questions

Are there state-specific W-4 vs W-2 Forms?

Yes. However, this depends on the state. Some states such as Alaska, Florida, and Nevada do not require a W-2 or W-4 at all. In New York, for example, you will not file a W-2 but you will need to file a NY-45 form. 

Do I have allowances to claim on my W-4?

The birth of a child, a new job, and marriage are factors that all affect the number of allowances that you claim.  If you need additional information, check out this website.

Where do I find the forms?

Both forms can be found on the IRS website. Here is a link for the W2 and the W4.

Do I claim 0 or 1 on my W-4?

The higher number indicates that less should be taken out of your pay. If you want to make sure that a larger amount is taken out of your pay, then you should put zero. 

What should I claim on my W-4?

When you claim something on your W-4, it refers to the various allowances that apply to your case. Refer back to question 2 for more information on allowances. 

Is it better to claim 1 or 0 if married?

It depends. If you and your spouse both work and earned a combined income that places you in the 25% bracket or higher, claiming 1 will ensure that enough taxes are taken out—this way you won’t owe (or owe as much) at the end of the year.