For the majority of Americans, tax season begins at the end of January. At this time, tens of millions of people are receiving a Form W-2 from their employer.
Receipt of the W-2 form and other documentation allows individuals and businesses to file their income taxes for the year. The U.S. Internal Revenue Service (IRS) then processes over 250 million tax returns per year.
While receipt of the W-2 form is the unofficial start to each tax season, the Form W-4 is equally important. Read on to learn about W2 vs W4. Explore the differences between these two IRS tax forms and why they are necessary for paying income taxes.
What is a W-4 Form?
The Form W-4 truly kicks off the federal income tax process. This form lets your employer know how much of your paycheck to withhold for taxes.
The calculation depends on a number of variables that affect your annual tax return. For example, are you single or considered a head of household?
Another important question for the W4 is whether you are married or have children. The IRS provides tax relief in the form of credits for children and dependents. By claiming them on a W4, you can reduce the tax withholdings from your paycheck.
The Form W-4 also provides guidance if you work multiple jobs. With some married couples, both people work and earn income. If this is the case, the instructions provide a worksheet for calculating tax withholdings.
Another important section of the W4 covers deductions. Not all tax filers use the standard deduction.
Some individuals make large donations or pay significant mortgage interest. Other filers have student loan interest or pay high state and local taxes. The W-4 form allows the withholding amount to be adjusted for these scenarios.
What Changes Were Made to a W-4 Form?
The W-4 form is not the same as it was a few years ago. In the past, you had the option of claiming allowances for dependents. The more allowances you claimed, the less your employer withheld in taxes.
However, the IRS moved away from this process when the Tax Cuts and Jobs Act (TCJA) passed in December 2017. For the vast majority of Americans, the TCJA resulted in an income tax cut. However, many tax filers were surprised to see that their 2018 and 2019 refunds declined.
This was because the IRS changed the W-4 form and how withholdings were calculated. Instead of basing tax withholdings on the number of allowances claimed, the IRS used existing data. They leveraged off of W-2 forms, prior tax filings, and other pertinent information.
Are You Required to File a W-4 Form With the IRS?
In the past, employers used to routinely submit W-4 forms to the IRS. This is no longer true after the passing of the TCJA.
Now, employers only need to file a W4 if they receive a written request from the IRS. This occurs when the IRS wants to ensure that adequate withholdings are made. It is largely used as a mechanism to prepare employees for tax season.
What is a W-2 Form?
The Form W-2 is a wages report that your employer files with the federal government. They are required to send you a copy, as well as to the IRS and the Social Security Administration (SSA). It is a federal law that the W-2 form for the prior tax year is provided to employees by the end of January.
There is a lot of financial data reported on the Form W-2. This data is used to complete your federal and state income tax returns. Continue reading for a breakout of the information found on a W-2 form:
Wages reported on the W-2 form are the most important information for your annual tax return. This includes hourly wages, tips, and bonuses.
There are other wages reported on the W2 such as state, local, and Social Security wages. Your federal wages in box 1 of the W2 may be lower than other wage reporting due to income exempted from taxes.
Taxes Withheld – W2 vs W4
Here is where your link between the W2 and W4 occurs. In boxes 2, 4, and 6 you will see the various taxes that are withheld from your paycheck. Box 2 is federal income taxes withheld during the year. This amount is directly correlated to the information provided on the Form W-4 discussed above.
The federal government also withholds taxes for the Federal Insurance Contributions Act (FICA). FICA covers the government entitlement programs of Social Security and Medicare.
Each time you receive a paycheck, your employer withholds taxes to fund these programs. When you retire and reach a certain age in the future, your contribution to these programs ends and you are given access to their benefits.
For Social Security, your employer withholds 6.2% of your earnings. On the other hand, Medicare’s withholding rate is 1.45%. These rates are applied to the first $137,700 that you earn.
You may be hit with an additional 0.9% withholding for Medicare if you earn more than $200,000. At the bottom of the Form W-2, you will see state and local taxes. The amounts vary based on which state you reside in, but some states do not have an income tax.
Other Deductions for W2 vs W4
There are other deductions that are important for tax filing. For instance, employees may contribute to a Roth 401(k) retirement account. Box 12 of the W-2 form would cover this.
Box 12 covers various different paycheck deductions. Two examples are nontaxable sick pay or reimbursable moving expenses for enlisted military.
Another important section of your W-2 form is box 14. This section includes withholdings like health insurance premiums and state disability insurance taxes. These items may be deductible on your tax return.
Why is this W2 vs W4 Discussion Important?
If you want to be in control of your finances, it is imperative that you understand W2 vs W4 and know the difference between the two. The last thing that you want is to be left unprepared for tax season.
The Form W-4 is the means to ensure adequate withholdings are taken from each paycheck. The Form W-2 wraps up the process and allows you to file a tax return.
If you have more questions about this W2 vs W4 discussion, contact us today for a consultation or explore our blog which has additional articles about IRS tax forms.