There are many unplanned activities every employer undertakes once in a while, and filling out payroll tax forms is definitely one of them. Payroll management and filing out tax forms are essential yet demanding tasks every employer deals with, especially for small businesses. While hiring employees and making payments for your team signals business growth, understanding rudimentary and essential tax responsibilities, like wage and tax statement, federal income tax and tax withholding, is crucial for the sustainability of your business and ensures you stay above compliance.
For every organization that hires employees and manages contractors, filing tax forms such as W-2 and W-4 are necessary activities for all employees - full-time employees, part-time employees, and independent contractors.
This article highlights everything you need to know about W-2 and W-4 forms, what they mean, when to use each one, and how to file them properly.
What is a W-4?
The IRS Form W-4 Employee’s Withholding Allowance Certificate, simply called a W-4 form, is a payroll document for employees that tells the employer how much income tax should be deducted from an employee’s income. It is a form that only applies to workers that are under contractual agreement with an organization or an employer as a full-time employee or part-time employee and does not apply to sole proprietors or independent contractors.
The W-4 form document is filled by an employee and filed by the employer on their behalf. Employees fill it out with information such as the employee’s withholding allowances, their marital status (tax filing status) and their number of dependents. It also includes information about the employee’s additional jobs. Depending on the employee’s state in the United States, employees fill out a version of this form as it applies to the state so that the state’s income taxes can be accurately withheld from their salary. However, for states like Texas, Washington, Florida, Alaska or South Dakota, there are no state and local taxes to be withheld.
Each employee of an organization is required to completely and accurately fill out their W-4 form before they start working for the organization or as soon as they start work and must be updated if their personal or financial status changes.
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What is a W-2?
The W-2 form or IRS Form W-2 (Wage and Tax Statement) is an Internal Revenue Service (IRS) document filled by an employer and submitted to the Social Security Administration (SSA). It documents how much an employee has earned in wages, bonuses, and other forms of compensation for a particular tax year. Every organization with W-2 employees are required to file the W-2 form on behalf of every single employee that earned at least 600 USD for that tax year, even if they no longer work for the organization at the time of filing the document. After filling it out and sending it to the tax agency, a copy of the document is made available to the employee either by email or postal delivery services.
Asides from the employee’s earnings in a particular tax year, the W-2 form records the amount of federal income taxes, state and local taxes as well as Medicare tax and Social Security contributions withheld.
Who completes these forms?
While the W-4 and W-2 have very similar objectives, they are both required to be filled by different entities, particularly during the tax season. These documents play crucial roles in the income tax process.
Employees in an organization have an obligation to fill out the W-4 form. This form serves as an employee's withholding certificate. The form contains personal information and withholding allowance information. When an employee fills out a W-4 form, it reports to the employer whether to withhold taxes at a rate that is either meant for employees that earn as lower married or higher single rates. It also communicates the number of withholding allowances an employee claims. Lastly, the W-4 form tells the employer whether the employee has to be exempt from withholding or requires an extra amount to be withheld, such as local income tax.
According to the United States' Internal Revenue Service tax process, married employees are required to pay less compared to what single employees remit as tax. Also, employees with dependents like children pay lesser tax rates than married employees with no kids or dependents.
The employer is responsible for sending out W-2 form to every employee who receives salary, wages or any form of compensation. This tax statement is crucial in assessing an employee's tax liability. However, independent contractors or self-employed workers are not required to file this form. An employer identification number is required for the process. The employer fills out the W-2 form using the employee’s payroll information for that tax year. Also, the employer is obligated to send this document on the 31st of January of each year. This gives the employee enough time to file their local taxes before the stipulated deadline which is typically on the 15th day of April.
W-4 vs W-2: Differences
W-4 and W-2 are very similar tax documents but their differences lies in the purpose they serve. The differences are categorized into who fills it out, what it is used for, when it is used and where to file the documents. Here are the differences
The form’s purpose
While W-4 and W-2 forms are both report tax information, they have uniquely different purposes which cannot be substituted for each other. The W-4 form reveals how much federal income tax is to be withheld from the employee’s wages, while the W-2 form reports the employee’s salary, wages and other forms of compensation received in the particular tax year. Employee’s fill out their personal taxpayer identification number and income tax return on this document.
Who fills it out
The W-4 is filled and completed by the employee while the W-2 is completed and filed by the employer. However, the information the employee inputs into the W-4 form is reflected in the W-2 at the end of the tax year.
What it is used for
The information contained in the W-4 form reports how much the employer withholds from the employee’s payment. It gives an informed report on the employee’s tax and income and how much tax is to be withheld before compensation, which plays a role in determining the employee's taz liability. The W-2 on the other hand, is a statement of the total compensation payment and taxes to be withheld. This include deductions such as student loan interest.
Frequency of filing
The W-4 is usually filled out at the commencement of a new job. However, it can be updated and resubmitted any time an employee's personal or financial circumstances change significantly, such as marital status, the birth of a child, or gaining an additional source of income. This ensures the amount of tax withheld from each paycheck accurately reflects their current situation. The W-2 form, however, is a yearly requirement. Every W-2 employee receives this form from their employer, regardless of changes in their personal or financial situation.
When Should Your Employees Submit Their W-4s?
Employees are required to fill out their W-4 forms when carrying out their onboarding process. However, updates can be made when there are changes to the employee’s income and compensation. Due to the fact that the W-4 is used to ascertain how much tax to withhold before paying the employee, it is best practice for the employee to fill, complete and submit the W-4 before their first paycheck.
When To File and Distribute Form W-2
As the W-2 reflects the payroll information of the previous tax year, employers are required to file the W-2 for each employee annually and not later than the 31st of January. The W-2 filled and submitted will reflect the tax information for the previous year.
File Taxes Compliantly With Skuad
Knowing the distinctions between the two payroll tax forms is essential for any organization with employees. It is also important to understand the finite details of these tax forms to make informed business decisions and ensure compliance with the employment laws of the United States. While managing compliance, especially for globally distributed teams can be challenging, global employment and payroll platforms like Skuad ensure global organizations can hire, onboard and pay employees with no hassles.
Skuad ensures organizations file taxes compliantly in the United States and enables organizations to hire full-time employees and contractors in over 160 countries without setting up a subsidiary. Skuad's global employment and payroll platform streamlines the process of hiring and onboarding contractors and employees compliantly, regardless of their location.
With Skuad, you won't need to worry about legal risks and fines, as the platform ensures your organization is fully compliant with country-specific laws and regulations. By establishing compliance as part of your corporate identity, you can focus on your organization's growth and development without the hassles of tax form nuances.
To navigate the complexities of global employment and payroll compliance, consider partnering with Skuad today.
Who should use a W4?
Every employee is required or mandated by law to file a W-4 form. It enables the employer to make the necessary tax deductions before the employee's payday. However, independent contractors and sole-business owners are exempted from filing a W-4.
Can you claim an exemption from tax withholding on your W-4?
Yes, you can claim an exemption from tax withholding on your W-4. What this means is that your employer will not withhold any of your income to your federal tax.