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W-2 vs. W-4: Key Differences

Byline profile imageWritten by Rosemary Carlson
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Byline profile imageEdited by Jeff White, CEPF®
Byline profile imageEdited by Arturo Conde, CEPF®
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Byline profile imageReviewed by Brandon Renfro, CFP®, RICP, EA
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A W-4 tells your employer how much tax to withhold, while a W-2 shows what you earned and what was withheld for the year.

If you’ve ever started a new job or filed your taxes, you’ve likely come across both a W-2 and a W-4 form, and while they sound similar, they serve very different purposes. The W-4 is something you fill out when you start a job to tell your employer how much tax to withhold from your paycheck. The W-2, on the other hand, is what your employer sends you at the end of the year to summarize how much you earned and how much tax was withheld.

Consider working with a financial advisor as you seek to pay only what you actually owe and not a penny more.

What Is a W-4?

A W-4, short for IRS Form W-4 Employee’s Withholding Certificate, is a form you fill out when you take a job with an employer as an employee. W-4s do not apply if you are working as an independent contractor. The W-4 is essentially an informational document that you, as a new employee, file with your employer. It is a payroll document that instructs your employer on how much tax they should take out of your income.

W-4 forms should be filed with your employer before the first day that you start work. It asks you for your marital status, the number of jobs in your household, dependents (as a dollar amount rather than allowances), and any adjustments such as other income or deductions. The modern W-4 no longer uses withholding allowances. If you pay state tax in your state, the state tax is also dependent upon your answers on the state version of the form.

If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington or Wyoming, you don’t pay state income tax. The W-4 does not address Social Security or Medicare contributions. The functions of the W-4 are to tell an employer:

  • whether you are single, married, or filing as head of household
  • whether you have multiple jobs or a working spouse
  • the dollar amount of the child tax credit or credit for other dependents you expect to claim
  • whether an employee wants an extra amount withheld or claims to be exempt from withholding

Based on the U.S. tax system, you pay less tax if you are married vs. single and less again if you have dependents, like children. Because allowances were eliminated in 2020, dependents are now entered as a credit amount rather than as “number of allowances.”

The old allowance categories for mortgage interest, SALT taxes, medical expenses or student loan interest no longer appear on the W-4. Taxpayers instead use Step 4(a)–4(b) to enter estimated deductions or other income.

You may occasionally need to adjust your W-4 information if you experience a change in your life circumstances. You can complete a new W-4 for your employer at any time. You will need to increase your withholding if:

  • you or your spouse add another job
  • you receive additional income not subject to withholding, such as dividends or pension income

You may need to decrease your withholding if:

  • you make estimated tax payments
  • you qualify for tax credits such as the child tax credit or credit for other dependents
  • you expect to claim itemize deductions that exceed the standard deduction

What Is a W-2?

A W-2 reports your yearly wages and taxes withheld, and your employer must file it with the IRS and send you a copy each January.

W-2 is short for IRS Form W-2 (Wage and Tax Statement) and it is filed with the IRS by your employer. Any business with employees is required to file a W-2 for each employee who was paid at least $600 for the tax year. A copy of the W-2 is sent to the employee for your records. You may receive it by postal service mail or by email. Employers have to file it by Jan. 31 of the year following the tax year.

A Form W-2 tells the IRS how much you have earned in wages, tips and other compensation for the tax year in question. It also informs the IRS about your contributions toward Social Security and Medicare.

The major sections of the Form W-2 are:

  • Employer identifying information
  • Wages, tips and other compensation
  • Social Security and Medicare payroll taxes paid
  • Federal income tax paid
  • State income tax paid
  • Local income tax paid
  • Retirement contributions paid

When you or your tax accountant prepare your taxes, those figures are transferred to your tax return.

W-2 vs. W-4 Differences

The first difference between the W-2 and W-4 forms is who fills out the documents and when. A W-4 is filled out by the employee when the employee accepts a new job or at any time after that when the employee wants to change filing status or update withholding information. A W-2 is filled out by the employer at the end of each tax year for the employee and is a statement of income and withholdings for that tax year.

The W-4 indicates the employee’s identifying information, marital status, number of jobs, dependent credit amounts and any adjustments for deductions or other income, while the W-2 is an end-of-year reporting document that has the employee’s wages, tips and other forms of compensation, tax withholdings and the amount of Social Security and Medicare taxes paid as well as retirement contributions.

The W-2 is filed with the Social Security Administration and a copy is given to the employee. The W-4 is not filed with any tax agency.

How an Advisor Can Help With W-4 and W-2 Decisions

Taxes can get complicated once you add in multiple jobs, a spouse’s income, investment earnings, or major life changes. A financial advisor can review your overall tax situation and help you decide how to adjust your W-4 so your withholding better matches what you’ll actually owe. This can reduce the risk of owing a large balance at tax time or consistently tying up too much money in over-withholding.

Advisors can also help you understand how your W-2 fits into your broader financial plan. They can show you how the reported income, retirement contributions, and withholdings affect your annual tax liability and long-term savings. If you are deciding between pre-tax and Roth contributions, or if you want to coordinate with other deductions and credits, an advisor can walk you through the trade-offs.

In addition, a financial advisor can run projections that combine your income, deductions, and expected tax brackets. These projections make it easier to see how much to withhold now and how to avoid penalties for underpayment. Advisors may also help you plan estimated payments if you earn outside income that doesn’t get reported on a W-2.

If you have more complex needs, such as equity compensation, self-employment income alongside W-2 wages, or planning for retirement contributions, working with an advisor can give you clarity. They can coordinate tax planning with your investment strategy and cash flow goals so you’re not looking at withholding in isolation.

Bottom Line

The W-4 tells your employer how much tax to withhold, while the W-2 reports your yearly wages and withholdings for tax filing.

The W-4 and W-2 are both payroll tax documents. The W-4 is completed by the employee and the W-2 is completed and filed by the employer. These documents do not pertain to independent contractors. The modern W-4 no longer uses allowances and instead relies on income, dependents, deductions and adjustments to determine withholding. The information completed on the W-4 by the employee results in the information that is reflected on the W-2 at the end of the year. It is filed with the IRS and the employee receives copies to assist in income tax return preparation for that year.

Tips for Tax Planning

  • Tax laws change, brackets are adjusted annually and what qualifies as a credit or deduction doesn’t always stay the same. That’s why a financial advisor can be helpful. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • SmartAsset’s income tax calculator can help you see the effect of taxes and provide you with an analysis of your tax status.
  • If you find that you’re regularly receiving large tax refunds, this may mean that you’re paying too much in taxes in the first place. In that case, you may want to adjust the withholding amounts on your W-4 so you can keep more money throughout the course of the year. Big refunds are exciting, but why give the IRS a free loan?
  • Use SmartAsset’s paycheck calculator to see the effect of taxes and withholding allowances on your paycheck.

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