Both the W-2 and W-4 forms play an essential role in the payroll and tax reporting process. The forms serve different functions for different stakeholders. What is the difference between W2 and W4 forms, and why does it matter to you?
It’s vital that employers and employees understand the difference between W2 and W4 forms.
For employers, mismanagement of these forms can lead to penalties and inefficient payroll operations.
For employees, a misunderstanding can contribute to unexpected tax bills or missed opportunities for financial planning.
When it comes to W2 vs W4, awareness, accuracy, and application contribute to financial stability and tax law compliance.
Read on to learn:
- What is better W-2 or W4?
- What is a W4 used for?
- What is a W-2 form used for?
- Do you need a W-2 or W4 to file taxes?
- What are three key differences between the W-4 form and the W-2 form?
What Is Form W-4?
A W-4 form helps employers determine the amount of federal income tax to withhold from an employee's paycheck.
An employee completes the W-4 form, or the Employee's Withholding Certificate, at the start of employment and when they need to change their withholding amount.
The form reflects personal information that influences tax withholdings and take-home pay, like marital status, number of dependents, and additional income.
By accurately completing a W-4, employees can help ensure that their employer is withholding the right amount of taxes for their circumstances.
The W-4 form changed in 2020, thanks to the 2020 Tax Cuts and Jobs Act (TCJA). The TCJA removed personal exemptions, increased the Standard Deduction, and made the Child Tax Credit available to more people. According to the Internal Revenue Service (IRS), some provisions of the TCJA that affect individual taxpayers can also affect business taxes.
The Internal Revenue Service recommends an employee update their W-4 annually, or when their personal situation changes.
What Is Form W-2?
Employers use a W-2 form, officially known as the Wage and Tax Statement, to report wages paid to employees and taxes withheld throughout the year.
This form:
- Summarizes employee earnings.
- Reflects salary, bonuses, tips, and other taxable fringe benefits.
- Recaps taxes withheld, including federal, state, and local, and Social Security and Medicare (FICA).
Employees use this information to file their annual tax returns, making it an indispensable part of the personal tax filing process.
Employers must provide a W-2 to each employee and the Social Security Administration (SSA) at year end. This ensures that both the employee and the SSA have accurate records of income and withholdings—vital for tax filing and social security benefit calculations.
W2 vs W4: What’s the Difference?
Employers and employees should take time to understand the differences between these forms. The differences determine how employers calculate, report, and withhold taxes, affecting both payroll operations and personal financial planning. The timing and purpose of each form are pivotal in understanding their roles.
The W-2 and W-4 have a significant impact on taxes.
The W-2 form provides the data necessary for employees to file their taxes. It summarizes the total earnings and withholdings, enabling accurate tax return preparation. Mistakes or omissions on a W-2 can lead to discrepancies in tax filings.
The W-4 form directly influences the amount of taxes withheld from an employee's paycheck. An incorrect W-4 can result in over- or under-withholding, leading to either a large refund or a substantial tax bill at year-end.
The Three Key Differences Between the W-4 Form and the W-2 Form
Here are the three key differences:
- Who fills out the form. An employer fills out the W-2. The employee fills out the W-4.
- What is the form purpose. A W-2 provides a compensation year-in-review. The W-4 directs an employer on how much tax to withhold from an employee paycheck.
- When it’s used. An employer fills out, files, and distributes a W-2 by January 31, of the following year. An employee completes a W-4 when hired or anytime their personal circumstances change.
Is W4 the Same as W2?
The W-2 and W-4 play a critical role in the payroll tax withholding and tax filing process. Both IRS forms impact employers and employees in distinct ways.
A W-4 documents how much tax to withhold from a paycheck. The W-2 documents total annual earnings and how much you paid in taxes.
So, no, the W4 is not the same as W2.
Why Understanding the Difference Matters
Understanding the difference between W-2 and W-4 forms matters to employees and employers.
Compliance with tax regulations is non-negotiable for employers and employees. Failure to adhere to federal, state, and local laws can have serious consequences for both employers and employees.
Employers may face audits, penalties, and damage to their reputation.
Employees could experience financial strain due to unexpected tax bills or penalties.
To avoid negative consequences:
Employers should:
- Accurately report earnings and withholdings.
- Ensure that all employee W-4 forms are up-to-date and stored properly.
- Conduct regular audits of payroll systems and processes to help identify and rectify potential compliance issues before they become problematic.
- Provide employees with information and resources to help them understand their withholding and tax obligations.
- Distribute W-2 forms by the January 31 deadline.
- Maintain organized records.
Employees should:
- Understand how to fill out a W-4 accurately.
- Update their W-4 forms in response to changes in their financial or personal situation or tax laws. By doing so, they contribute to maintaining compliance and ensuring their financial well-being.
Common Mistakes and How to Avoid Them
Navigating tax forms can lead to errors if you're not careful. Both employers and employees can make mistakes that have financial consequences.
Here's how to avoid and help prevent 3 common pitfalls associated with W-2 and W-4 forms.
1. Misreporting W-2 Wages
One frequent mistake is reporting incorrect wages on the W-2 form.
Reporting errors can stem from miscalculations of wages, bonuses, or fringe benefits, or from failing to update payroll systems promptly.
To help remedy this pitfall, employers should:
- Correctly document payments, including bonuses and fringe benefits.
- Establish and maintain robust internal payroll procedures.
- Regularly train payroll staff.
- Accurately maintain payroll records.
- Consider automating payroll with a provider like SurePayroll® By Paychex.
- Regularly audit payroll records.
2. Inaccurate W-4 Submissions
Employees sometimes incorrectly fill out their initial W-4 or fail to update their W-4 form when life changes occur. This can result in incorrect withholding amounts.
To help remedy this pitfall, employers should:
- Provide employees with information and resources on how to correctly fill out a W-4.
- Remind employees throughout the year to update their Form W-4 for life events, including marriage, divorce, or having a child.
3. Miss Filing Deadlines
The significance of timely filing cannot be overstated. Delays can disrupt employees' tax filing processes and result in financial penalties for employers.
Employers must send W-2 forms to employees and the SSA by January 31, of the following year.
To help remedy this pitfall, employers should:
- Establish and maintain a reliable calendar system.
- Set reminders for filing deadlines.
- Conduct regular checks of payroll processes.
How SurePayroll Helps Simplify W-2 and W-4 Management
Managing payroll and tax forms can be challenging for small business owners. Investing in payroll automation software, like SurePayroll, can help simplify the process and reduce errors.
Trusted by small businesses and households for 25 years, SurePayroll offers a simple, no-nonsense payroll solution with no long-term commitment.
SurePayroll helps automate tax calculations, filing, and record-keeping. The software also integrates with tax software, providing seamless data transfer for tax filings.
Conclusion
Whether you're a small business owner or an employee, understanding the differences between W-2 and W-4 tax forms matters.
These differences determine how employers calculate, report, and withhold taxes, affecting both payroll operations and personal financial planning.
Taking time to understand how to accurately fill out and file W-2 and W-4 tax forms can save you time and prevent costly errors.
