Small business owners have a lot going on, from handling new employee on-boarding and day-to-day account tasks to building a strong business plan and navigating hundreds of IRS forms. It’s no wonder why some of the more granular parts of running a small company are easy to overlook.
Correctly utilizing (and knowing the difference between) the W-2 form and W-4 forms provide a great example for those small details that are vital, yet seem easy to sweep under the rug. While they’re both used to report tax withholdings, are federally required, and are an essential form for your paid employees, each serves a different purpose.
Here’s a quick summary:
- W-4: This is what your employee fills out to tell you how much federal (and sometimes state) tax to deduct from their earned income.
- W-2: This is what the employer needs to fill out for every employee every year, detailing for the employee (as well as the IRS) their gross pay and tax deductions.
In this post, we’re providing a detailed breakdown of the core differences between the two and everything else you need to know about using them correctly for your small business.
Let’s Start With The Basics: Why These Forms Matter
Before diving into the details of each of these forms, it’s important to first understand the fundamentals of a W-2 and W-4 and why they matter. Essentially, these forms affect taxes—for the employer and employee. Understanding the various facets of these forms can help employees maximize their tax refunds and help businesses gather necessary employee information.
Both forms 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 known as the employee’s withholding allowance certificate. Filled out by employees when they’re first hired, this form tells your payroll team exactly how much federal, state and local taxes to withhold from an employee’s paycheck. Everyone will have different financial plans. The W-4 tax form is where they tell you, the employer, exactly how they’d like to approach this.
There’s one other important thing to note about the W-4: While some states also use W-4 forms for state-specific taxes, others don’t. You’ll need to ensure your employees fill out forms for both federal withholdings and state withholdings. Find out what form you need by state.
What is a W-2?
The W-2 is often referred to by the IRS as a wage and tax statement. W-2 forms are filed annually by employers for each of their employees and document the employee’s gross earnings, their deductions for income, social security or Medicare taxes, childcare, and retirement savings. Every one of your employees gets a W-2 at the end of the year. As an employer you’ll also submit an electronic copy directly to the IRS—usually at the start of a new year. There are payroll or accounting software platforms will assist with W-2 filings.
Here Are The Core Differences Between the W-2 and W-4
Now that you know the different purposes of each form, it’s important to understand how they relate to your business and what you’re going to do with them.
Who’s Responsible For Completing Each Of These Forms?
- W-4: Employees are responsible for filling out this form. Each employee fills out their personal information and withholding allowances depending on their unique circumstances and financial preferences.
- W-2: The employer is responsible for completing this form. Based on the payroll data you’ve accumulated from the year, you’ll complete a W-2 for each of your employees.
When Do You Need To Fill Out These Forms?
- W-4: This should be filled out as part of an employee’s new hire 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 payday. An employee only needs to complete a new W-4 if their personal or financial situation changes, and, as a result, they want to adjust their deduction allowances.
- W-2: This is an annual form that reflects data from the previous year—a W-2 filed in January 2019 will reflect payroll and tax information from 2018. You must file a W-2 for every employee, every year, no later than January 31st.
What Information Is Required for Each Form?
W-4: The W-4 contains the employee’s identifying information—name, address, Social Security number—and withholding allowance information. Information needed for the W-4 includes:
- Employee’s full name and address
- Employee’s social security number
- Employee’s marital status
- Employee’s selected tax allowances/exemptions
- Employee’s signature and date of signing
W-2: The W-2 contains identifying information about the employee, the employer, and wages and deduction breakdowns for the employee for the year. Information needed for the W-2 includes:
- 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 withholding
Applying This Information to Your Business and HR Process
The difference between a W-2 and W-4 seems a little bigger than you might have thought, right? That’s why they’re both important elements in running clean payroll and accounting every year. Make sure you have the right tools in place to simplify tax forms and payroll for your business and your employees. Request a demo with ScaleFactor’s accounting and tax experts today to learn just how financial and accounting software can put all the information you need right at your fingertips.