W-2 and W-4 Form Differences
Although both federally required IRS tax forms, the W-2 vs. W-4 are inherently different. The W-4 informs employers of the appropriate tax withholding amount to be taken from an employee’s paycheck. The W-2, on the other hand, is a report generated by an employer that details an employee’s earnings and tax withholdings for the given tax year.
As a business owner and a professional, there’s no doubt you’ve been exposed to the W-2 and W-4 forms, as they’re each federally required for business tax purposes. Even so, you may still find yourself asking: What is a W-2 vs. a W-4? This guide is here to help. We’ll compare the W-2 vs. W-4 forms, explaining not only the core differences between the two but also everything you need to know about how to fill each one out correctly for your business.
W-2 vs. W-4: The Basics
Before we break down the W-2 vs. W-4 form differences, it’s important to briefly explain the basics of these two forms. Both the W-2 and W-4 are IRS tax forms that can be found online. The W-2 and W-4 must be filled out for each one of your employees and can be considered part of HR for your business, as well as your accounting and payroll processes.
What Is a W-4?
The W-4 is also known as the employee’s withholding allowance certificate, meaning this form dictates the federal income tax that you will withhold from your employee’s pay. Each employee should correctly complete a W-4 as part of their new hire paperwork on their first day of employment (or, at the very least, before their first paycheck) and update it annually if their personal or financial situation changes. Once your employee has completed their W-4, you will use the information provided to calculate payroll—withholding the correct federal tax amount each time you run payroll and pay your employees.
What Is a W-2?
The IRS refers to the W-2 form, on the other hand, as a wage and tax statement. W-2 forms are filed annually by employers for each of their employees and indicate the employee’s gross earnings, as well as their deductions for income, social security or medicare taxes, child care, and retirement savings. Employees use their W-2 forms to file their annual personal tax returns. W-2 forms can be filed electronically or completed manually and mailed to the Social Security Administration (SSA). Many payroll or accounting software platforms will assist with W-2 filings.
W-2 vs. W-4 Form Differences
Now that we know a little more about these two IRS forms, let’s break down the core differences of the W-2 vs. W-4 and explain how they relate to your business.
What Purpose Do They Serve?
W-4 Form: The W-4 form is used to inform you, as an employer, the necessary amount to deduct from your employee’s paycheck for taxes.
W-2 Form: The W-2 form, on the other hand, is an annual report—detailing for the employee (as well as the IRS) their gross pay and tax deductions.
Who Completes the Forms?
W-4 Form: The W-4, as we’ll further explain later, is filled out by your employees. Each employee fills out their personal information and withholding allowances on the W-4. As an employer, you only need to fill out part of the W-4 if you’re using the document to fulfill state new hire reporting requirements.
W-2 Form: For the W-2, the employer is responsible for completing this form. Based on your payroll data from the year, you complete a W-2 for each of your employees.
When Are They Completed?
W-4 Form: The W-4 form should be filled out as part of an employee’s onboarding paperwork. Since the W-4 will determine the amount of tax deductions withheld from an employee’s paycheck, they should complete a W-4 before their first pay day. After they complete their initial W-4, an employee will only need to complete a new one if their personal or financial situation changes and they want to adjust their deduction allowances as a result.
W-2 Form: A W-2 is an annual form that reflects data from the previous year—a W-2 filed in January 2020, therefore, will reflect payroll and tax information from 2019. You must file a W-2 for every employee, every year, no later than January 31.
What Do You Do With Them?
W-4 Form: Once your employee fills out their W-4, you should file it (either electronically or physically), but you do not need to submit it to the IRS or SSA. As we mentioned above, you only need to file a W-4 form if you’re using it to meet state new hire reporting requirements.
W-2 Form: You must submit all W-2 forms to the SSA, either by mail or filing electronically. Additionally, you must also distribute completed W-2 forms to all of your employees each year, no later than January 31.
W-2 vs. W-4 Forms: How to File
To ensure that you’re meeting both W-2 and W-4 requirements for your business, let’s go through how to find and fill out each form, as well as some tips to help simplify the process.
W-4 Form: Employee’s Withholding Allowance Certificate
As we discussed above, the W-4 form should be completed by each of your employees ideally on their first day of employment—and definitely before their first paycheck. The W-4 will inform the amount of income taxes to deduct from your employees’ paychecks when you run payroll. You can find the most up-to-date W-4 form on the IRS website and print it out for your employee to complete. Some HR or payroll providers also allow your employees to complete their W-4 electronically within the platform and automatically input the relevant data into your payroll system.
To accurately complete the W-4 form, your employee will need to provide:
- Full name and address
- Social security number
- Marital status
- Tax allowances/exemptions
- Signature and date
Example of a blank W-4 form. Image source: IRS
To determine their appropriate number of allowances, your employee will complete the worksheet included with the W-4 form or use the IRS tax withholding calculator. Typically, higher allowance numbers mean fewer taxes are withheld. A single individual with no dependents with a number “1” allowance, therefore, will have more taxes withheld than a single parent with multiple dependents who is filing a number “4” allowance. An employee can claim exemption if they believe their income will result in no tax liability.
It’s important to remember that you cannot tell your employees how to fill out their W-4, but can offer resources to help them determine their correct allowances. Also, you only need to complete numbers eight through 10 on the W-4 if you’ll be sending the form to your State’s Directory of New Hires to fulfill new hire reporting requirements.
Once an employee has completed their W-4, they’ll return it to you and you will keep the form on file for reference. You will also input the withholding information into your payroll system to ensure the correct amount of income tax is withheld from each paycheck. Your employee can update their W-4 as they see fit, in which case you should update your filing system with the new W-4 as well as adjust your payroll data accordingly.
Furthermore, depending on your specific state, your employees may also be required to file state W-4 tax forms. State W-4 forms will specify state income tax withholding and will follow the same procedure as the federal W-4. You can refer to the government website in your state to confirm any state tax withholding form requirements.
W-2 Form: Wage and Tax Statement
Unlike the W-4, you, as the employer, are solely responsible for completing and filing W-2 forms. W-2s detail the gross pay and tax deductions for the respective year for each of your employees. As such, this form must be completed for each of your employees annually and filed with the SSA. The SSA recommends filing W-2s electronically, but you can physically file as well.
W-2s must be completed no later than January 31 for the previous year and distributed to your employees in addition to filing with the government. W-2 forms can be accessed on the IRS website. In many cases, your accountant or payroll administrator can help you with W-2 filings. Additionally, many payroll software platforms allow you to file W-2s through their system as well.
To complete the W-2 form for each of your employees, you will have to fill out:
- Employee’s social security number
- Your employer identification number (EIN)
- Your name, address, and zip code
- Employee’s name, address, and zip code
- Employee’s wages and tax withholdings
Example of a blank W-2 form. Image source: IRS
The specific tax withholdings you complete will depend on your business and individual employees—dependent care benefits and retirement plans, for example, might not apply to every employee, and therefore might not apply to every W-2 you complete. Again, the IRS provides detailed instructions on how to complete each box within the W-2. Once you’ve completed all of your W-2 forms for your business, you’ll file them with the SSA and distribute them to your employees. It’s important to remember that you must file and provide a W-2 for every employee that worked for you during that tax year, even if they’re not currently employed by your business when you generate the forms.
Additionally, you’ll want to remember that W-2s only need to be completed for employees and not for contractors. For 1099 contractors, on the other hand, you’ll file the 1099-NEC form (previously the 1099-MISC for tax years 2019 and earlier). The 1099-NEC form (and, previously, 1099-MISC) is similar to a W-2 in that it reports the contractor’s income received and any tax withholdings you made for that individual. Like W-2s, 1099-NEC and MISC forms should be filed before January 31 and distributed to all of the independent contractors that worked for you within that tax year.
Tips for Small Businesses Filing W-2 and W-4 Forms
The W-2 and W-4 forms serve different purposes but are both equally important for your business and employees. These tips will help you streamline your W-2 and W-4 processes so that you’re not only completing the forms correctly but also in the most efficient way possible.
- Be proactive. Both the W-2 and W-4 forms have timeframes that must be adhered to, so you’ll want to make sure you’re on top of deadlines and not waiting until the last minute to complete these forms. Waiting until the last minute can lead to errors or missed deadlines, which in the case of W-2s, can incur a late penalty from the IRS. That being said, it’s best to have your employees fill out their W-4s on their first day of employment and input the relevant information into your payroll system as soon as possible. For W-2s, you’ll want to make sure you start working on them first thing in the new year to meet the January 31 deadline.
- Consult a professional. Although the IRS website includes detailed instructions on filling out both of these forms, they still can be confusing, especially if you have many employees and other business responsibilities to take care of. To address any concerns, especially in the case of W-2s, it’s helpful to consult your business accountant or tax advisor. These professionals have experience with IRS tax forms and can answer any questions, or even help you complete them correctly.
- File electronically, if possible. When it comes to the W-2, the IRS recommends that you file electronically. Not only will filing electronically save paper, but it will certainly be quicker and easier for your business. Additionally, although you don’t actually need to file W-4s with the federal government, it may be easier to have your employees fill them out electronically. Similarly, you may want to store W-4s electronically as well—doing so will help you stay organized and secure, as well as allowing you to access them quickly if necessary.
- Use payroll or HR software. Using payroll or HR software that has W-4 and W-2 capabilities is perhaps the easiest way to streamline your tax form processes. Not only will you be able to complete and possibly file the forms within the platform (depending on the system you choose), your employees will also be able to fill out their required forms and access them later as needed.
- Take caution. As you do with all of your business tasks, take extra caution when completing W-2s and helping your employees complete their W-4s. Errors made on either of these forms can hurt your business and your employees—especially in the case of an audit—so a little extra time spent on W-2s and W-4s now will save you time (and money) in the long run.
The Bottom Line
At the end of the day, you will see both the W-2 and W-4 form again and again as you run your business, so it’s important to know the ways in which they’re different. Essentially, although they’re both tax-related forms, the W-4 informs you, as an employer, of the amount to withhold from your employee’s paycheck, while the W-2 reports an employee’s earnings and withholdings for a given year.
This being said, you’ll want to make sure that both forms are completed correctly and within the appropriate timeframe as dictated by the IRS. Utilizing payroll software and consulting with a tax professional are both great ways to help your business optimize these processes and ensure that you’re clear on all your tax form requirements.