W-2 vs W-4: A Comparative Guide for Every Payer

The IRS requires the employers to fill out various payroll tax forms to stay compliant. W-2 and W-4 forms are two important tax documents, each of which serve different purposes for the employer and employee.

Form W-4 is filled out by employees and calculated by employers to determine how much tax to withhold. On the other hand, W-2 form is issued by the employer to its employees and the IRS to report the income and how much tax was withheld.

But how do the two tax forms differ? In this post, we’ll discuss the key differences between W-2 and W-4 forms with a side-by-side comparison and how the two forms are completed by different parties at different times.

What is Form W-2?

A W-2 form is an IRS tax form that employers use to report the total income and tax withheld for each employee. Any business that paid at least $600 to its employees for the tax year should fill out the W-2 form.

It also informs about how much the employee earned in wages and tips in that year.

A copy of W-2 form is sent to each employee by post or email. This end of the year wage form should be filed annually by January 31 of the following tax year.

A W-2 form also informs the IRS about the contributions towards Social Security and Medicare.

Pre-filing checklist for W-2 form:

You must file W-2 form if you withheld federal tax, Social Security tax or Medicare tax as an employer.

Before you start filing a W-2 form, you must be ready with a pre-filing checklist. Here’s what you need to look out for to furnish your information in W-2 form:

• Verify Employee Social Security Number (SSN):
  SSN tracks the employee’s past wages and Social Security. As an employer, you should verify employee information, including SSN, full legal name, address, and contact details.
• Review payroll records:
  It is important to collect and review payroll information such as total wages paid to the employee, federal income tax withheld, any other compensation, etc.
• Check Employer Identification Number (EIN):
  A nine-digit identifier assigned by the IRS to every U.S. business. This serves as a federal tax ID for the businesses. You should match the EIN filled in W-2 and W-3 forms with the one registered with the IRS.
• Understand what goes in each Box:
  Box (1) to report wages and compensation, box (2) for federal income tax withheld, and box (3) & (4) to report Social Security wages and Social Security. For reporting Medicare wages and tax withheld, tick boxes (5) & (6) respectively. Fill box (16) to report state wages and box (18) to report local wages.
• Reconcile year-end total and prepare Form W-3:
  Don’t forget to match payroll totals with quarterly form 941 and summarize all W-2 filings to submit to the SSA.

Form W-2 Deadline

Employers must send copies of completed W-2 forms to their employees and the IRS by January 31.

• Furnish Form W-2 to employees
• File Form W-2 and Form W-3 with the Social Security Administration (SSA)
• Most states that require income tax withholding also follow the deadline of January 31.

Filing Rules for Form W-2

IRS requires you to submit all the W-2 forms electronically through the Social Security Administration’s Business Services Online (BSO) system. You should file collectively W-2 forms such as W-2, W-2AS, W-2GU, and W-2VI, and W-2c (correction forms) but not W-2CM if you need to file at least 10 returns in a tax calendar year.

To determine if you need to file W-2 forms electronically, add the total number of information returns to the number of W-2 forms. If the total is more than 10 information returns, you should necessarily e-File W-2 form.

If the employer fails to eFile W-2 forms exceeding 10 information returns, it will be liable for a penalty.

What is Form W-4?

A W-4 form is an IRS tax form also called the Employee’s Withholding Certificate. This form is filled by the new employees once they accept the offer of employment.

However, it does not need to be filled out by the independent contractors. A W-4 tax form guides employers on how much federal and state tax they should deduct from each employee’s income.

W-4 form is a tax variable. This means that the deducted tax varies depending on the employee’s marital status, dependents and withholding allowances.

Pre-filing checklist for W-4 form:

You must collect W-4 from every employee in case of:

• First day of employment.
• Major life changes such as marriage or children
• Significant income adjustments

Here’s a quick checklist for filing a W-4 form:

• Enter personal information: This box includes field for first name, last name, address and a box for filing social security number. You will also require the filing status, example if you are single, or married & filing jointly, or head of household.
• Review employment situation: Whether you have single or multiple jobs has to be mentioned in the form. Incase you are married and file jointly, you need to mention if your spouse is employed too. You can use the IRS tax withholding estimator to accurately review it.
• Understand how to claim dependents: If your total income is under $200,000 (or $400,000 if married filing jointly), you can claim $2,000 per child and $500 per dependent.
• Don’t forget to sign the form: Unsigned forms are considered invalid and can’t be processed. So, make sure you sign and mention the date on the form.

Form W-4 Deadline

Although there is no deadline to file W-4 form, the employee should report any tax exemption by February 15 of that year.

Filing Rules for Form W-4

W-4 form is only filed for payroll withholding purposes. Hence, you do not need to send a copy to the IRS.

However, you should keep the received W-4 form in your payroll system for a period of four years. There are certain criteria that may increase or decrease the withholding in the W-4 form.

For instance, you’ll need to increase withholding if the employee has a working spouse or has additional income such as interest and dividends. If the employee had no tax liability in the previous year and current year, he is eligible for filing a withholding exemption.

In case the employee files a new W-4 form for withholding exemption after February 16, you can apply it to the future paychecks.

W-2 vs W-4: Side-by-Side Comparison

Below, we’ve given a quick glance at a comparison between the W-2 and W-4 forms based on certain features.

How does W-4 affect the W-2 form filing?

Form W-4 reports how much federal tax the employer should withhold from the employee’s paycheck. The employer reports this tax withheld in Box 2 of the W-2 form. So, information such as filing status, dependents, and any extra withholding amounts impacts the federal income tax withheld from the paycheck. Hence, employees should carefully fill in the W-4 form to avoid discrepancies.

Common Mistakes to Avoid While Filing W-2 and W-4 Forms:

Evidently, an incorrect W-4 form can affect the W-2 filing, leading to hefty penalties for both employees and employers. However, there are other pitfalls that you should look for and avoid with a quick fix:

Missing W-4: If the employee fails to furnish the updated W-4 form when they start, the IRS considers the tax withholding as if the worker is single with no dependents.

• Quick fix tip: Make sure to ask for W-4 form from each new employee or if they have any tax withholding changes from the previous year.

Wrong SSN on W-2: A wrong SSN on W-2 will lead to the SSN mismatch and the IRS will not consider your W-2. This can be considered a late or missed W-2, leading to penalties.

• Quick fix tip: Use form W-2c to correct the errors in W-2 and submit to SSA as soon as you discover the mistake.

FAQs

     1. Does the payer need a new W-4 every year?

No. Payer does not need to submit a new W-4 form. A new W-4 form should only be submitted in case of withholding changes such as dependents or income changes.

     2. Can paper W-2s still be filed?

Yes, you can file the W-2 form if the total information returns are less than 10 for that year. If the total information returns aggregate to more than 10, you must file W-2 electronically.

     3. What if I file W-2 after the due date?

If you file a W-2 form after the due date, you may be liable for penalties ranging from $60 to $680. If you file W-2 within the 30 days of the due date, penalties start at $60. If you file W-2 form between January 31 and August 1, you should be paying $130 for each return. Any filing after August 1 may incur penalties up to $340.

     4. How long to store W-4s and W-2s?

According to IRS, employers must store the copies of W-4 and W-2 forms for at least four years from the date of the filing.

      5. Will a new W-4 fix past paychecks?

No. A new W-4 will not fix any past paychecks. A new W-4 form with updated withholding status or income changes will only affect the future federal tax withholding.

     6. How long does the tax exemption last on W-4 form?

The tax exemption only for previous years lasts until February 15 of that year. To request a tax exemption again, you will need to submit a new W-4 form before February 15 for the current year.

     7.What triggers a W-2c correction?

Incorrect filing of W-2 form may trigger a Form W-2c (Corrected Wage and Tax Statement). Information such as incorrect SSIN or employee name or wrong wages or compensation may possibly require a W-2c correction.

Final Thoughts

As a business taxpayer, treating W-2 vs W-4 as a connected process keeps payroll smooth and audit-proof. Collect the W-4 correctly, update when changes happen, and file accurate W-2s by the January 31 deadline.

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