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Young man preparing his tax returnsIf you are an employee of a business, you are required by the Internal Revenue Service (IRS) to fill out payroll tax forms that tell your employer how much tax to deduct from your income. This is the W-4. Your employer is also required to fill out a tax form in order to report your income and deductions to the IRS. That is the W-2. Let’s look at these forms, the W2 and the W4, their similarities and differences and how and when you complete them. 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 Allowance 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, dependents and withholding allowances. The federal income tax tables are built around those variables. If you pay state tax in your state, the state tax is also dependent upon your answers to those three variables. 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 to withhold taxes at the higher single or lower married rate
  • how many withholding allowances an employee claims
  • 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. Withholding allowances are claimed under the following circumstances and each one reduces the amount of your withholding:

  • One allowance for each qualifying child under age 17 and one for each additional dependent (perhaps an elderly parent)
  • One allowance each for home mortgage interest, charitable contributions, state and local taxes up to $10,000, allowable medical expenses of over 7.5% of an employee’s income, student loan interest or deductible IRA contributions

You may occasionally need to adjust your withholding allowances 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 allowances if:

  • both you and your spouse work
  • you have income other than from employment that is not subject to withholding. Pension income and large amounts of interest or dividends are possible examples

You may need to decrease your withholding if:

  • you make estimated tax payments
  • you are eligible for tax credits such as the child tax credit
  • you are eligible for deductions other than the standard deduction such as the deduction for student loan interest, contributions to an IRA or you itemize deductions rather than take the standard deductions

What Is a W-2?

W-2 Form

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 at the end of 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 their withholding allowances. A W-2 is filled out 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, dependents and withholding allowances 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-4 is completed by the employee when hired by a new employer and then every time there is a change in circumstances that might affect withholding allowances. The W-2 is completed at the end of the tax year.

The Bottom Line

W-4 formThe 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 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 on Taxes

  • 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 so helpful. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one 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.

Photo credit: ©iStock.com/Nattakorn Maneerat, ©iStock.com/dtimiraos, ©iStock.com/Kuzmik_A

Rosemary Carlson
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