W-2 vs W-4: What Is the Difference & When to Use Them

A W-4 is an IRS form that an employer uses to collect tax withholding information for an employee. A W-2 is a year-end tax document that’s required from the IRS and used to report an employee’s yearly income and taxes. We’ll compare both in detail and walk you through when and how to use each of these.

Disclaimer: Tax laws change regularly. For the most up to date information please refer to the IRS.gov site or your own payroll/tax accountant.

The Difference Between W-4 & W-2: Inputs & Outputs

The distinction between the two tax forms is that a W-4 is an input document and also a W-2 is an output signal document. An employee uses a W-4 to inform the company’s payroll department just how much tax to subtract from their earned income. Afterward, at year end, a W-2 reports three-year deductions and earnings.

The W-2 is supplied by the employer to the employee, summarizing gross pay for the year. It features advice on how much was taken from the employee’s gross pay for deductions, such as local and state taxes.

This is how data flows from W-4 to W-2 for a typical employee:

Details About a W-4: Employee’s Withholding Allowance

A W-4, which is the employee’s withholding allowance certificate, is typically provided when an employee has accepted an offer of employment. It needs to be done prior to the initial payroll. The payroll department may use the info on the W-4 to determine how much federal, local and state taxes need to be taken from their worker’s pay check, dependent on which they employee selects on the W-4 form.

If an employee fails to complete the W-4 prior to their first payroll cycle, the corporation should process payroll as if the worker had selected single with zero allowances. They might also use the worker’s W-4 in the previous calendar year. Once completed, a copy of the signed W-4 form is to be kept by the employer because the IRS may request a copy.

W-4 Allowance

An allowance is a few clarifying what tax rate should use. A worksheet is provided in the W-4 instructions to help calculate it. In general, the higher the number, the less tax withheld. For instance, a single parent with two kids might decide on an allowance of 3 whereas a unmarried person with no kids might choose an allowance of 1.

W-4 Exemption

A worker can assert a W-4 exemption if they expect their wages will result in no tax obligation. By way of instance, if the standard deduction for a married couple is $24,000 and your sole-wage-earner employee understands they will earn less than that, they might wish to consider asserting an exemption. Here are the rules for claiming an exemption from withholding.

State-Specific W-4 Types

Several states also utilize the W-4 as is to ascertain state tax withholdings, including Colorado, Minnesota, and Mississippi. The IRS indicates you compose’State Withholding’ about the state-version of this W-4 form. But some states, such as Alaska and Texas, don’t have any state tax withholding requirements so they’d don’t need to have a state withholding form.

Most other states have their particular state tax withholding form very similar to a W-4. For example, in Georgia it’s called a G-4 withholding type, in Illinois it is an IL-W-4, and in Kentucky it is a K-4. For a complete listing, have a peek at state-specific tax forms provided by the Bureau of Labor Statistics (BLS).

Where to find a W-4?

The W-4 Form is offered to the worker by the company. Additionally, it is downloadable from the IRS site in English or Spanish, or available through your online payroll provider. It is not uncommon for employers to require this form, along with I-9 and other documentation, to be completed during onboarding and before the employee’s first paycheck.

• Download IRS Form W-4 in the IRS site
• Download IRS Form W-4S (Spanish) in the IRS site
• View instructions for completing IRS Form W-4 in the IRS site

When the employee completes the national W-4 (and comparable withholding documents needed by the state), it needs to be filed in the payroll document or employee’s personnel folder.

If you are thinking about streamlining your payroll procedure, you might want to look at a payroll software company that handles onboarding paperwork electronically such as W-4 forms and I-9 documentation, as well as year end taxes. We advocate Gusto as best for small business citizenship.

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Details on a W-2 Wage and Tax Statement

Officially an IRS Form W-2 Wage and Tax Statement, the W-2 is your year-end tax record. It provides information on the worker, their earnings (gross pay, bonuses, tips), and any deductions taken out for taxes, savings/retirement, or childcare.

Where to Find a W-2

The W-2 Form is offered by the company to present and former employees annually. Typically, a business will supply W-2s electronically to the IRS while sending them through the mail to all workers who worked during that tax year.

You may download a blank document from IRS.gov along with directions.

• Download blank IRS Form W-2
• View instructions for IRS Form W-2

Additionally, the IRS provides customized W-2 types for American Samoa (W-2AS), Guam (W-2GU), and the US Virgin Islands (W-2VI).

When the W-2 is Due

The IRS requires that a W-2 be delivered to the IRS and employees by January 31 for the prior tax year. By way of example, for 2018, W-2 forms must be sent by January 31, 2019. It’s provided for every person who worked for you as a worker during that prior tax year — if still employed with your company or not.

But some payroll software offers self-service options that enable workers to download their particular year-end W-2. That is useful in case they have moved and you don’t have an upgraded USP mailing address. You can send them a protected email connection to their W-2, meeting IRS requirements and which makes it feasible for them to document their taxes.

W-2s for Contractors

Contractors don’t typically receive a W-2. Instead, they get a 1099-MISC. For a summary of the differences between a W-2 and 1099, browse our post here. And for the differences between a W-9 and 1099, browse our post here.

The Most Important Thing

W-4s and W-2s are related — both are IRS tax documents, however, the W-4 is the input form, used to gather employee information, and also the W-2 is the output form, provided at year end so that employees can file their earnings. Keeping them straight and explaining the gap to your workers may help them maximize their tax refunds.

Of course, if managing the payroll and taxation reporting aspects of your company is not your favourite business action, consider outsourcing payroll to a payroll software supplier such as Gusto, and allow somebody else manage the payroll and taxation paperwork for you.

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