As the saying goes, nothing is certain except death and taxes, and this is certainly true for business owners.
Taxes are a crucial part of owning a business, and if you have employees, you’ll have to get involved in their taxes, too.
As a small- to mid-sized business, you likely know a lot about your chosen industry—whether that be food, hospitality, or healthcare. But unless you run an accounting firm, there’s a good chance you don’t know a lot about taxes.
In this article, we’ll review two of the most common IRS forms you’ll use as an employer to help you understand the differences between W-4 vs W-2.
What Is a W-4 Form?
Also known as the Employee’s Withholding Certificate, W-4 forms are filled out by your employees. W-4 forms allow you to withhold the correct amount of taxes from your employees’ paychecks.
Typically, employees fill out a W-4 when they are first hired and whenever their filing status changes.
IRS form W-4 asks for the employee’s:
- Name and Address
- Social Security Number
- Filing Status (Single, Married filing jointly, Married filing separately, or Head of household)
- Number of Dependents
- Additional employment information
Please note that you will only need to fill out one W-4 form for federal income taxes, but additional forms may be required if you are required to pay state income tax.
What Is a W-2 Form?
While W-4 forms are filled out by the employee, Form W-2, or Wage and Tax Statement, is filled out by the employer.
You are required to file a W-2 each year for every employee that earned $600 or more in the previous year, even if they no longer work for the company.
In addition to the employee’s personal information (such as EIN and address), W-2 forms list their total wages (including tips and non-cash compensation), benefits, taxes that were withheld, and contributions to other accounts (such as retirement accounts).
You must send a copy to every employee by Jan. 31 of each tax year.
W-4 vs W-2: What’s the Difference?
Both tax forms have a different purpose but they are equally necessary to hire employees legally.
Who fills it out?
W-4 forms are filled out by every full- and part-time employee, while W-2 forms are filled out by the employer.
When is it filled out?
W-4 forms are filled out once, when an employee is first hired. However, if their filing status changes (i.e. they get married or gain dependents), they can fill it out again to update their information.
On the other hand, W-2 forms are filled out every year.
How is it used?
W-4 forms notify employers how much federal and/or state taxes to withhold from their employees’ paychecks.
W-2 forms tell the employee and the Internal Revenue Service (IRS) what their gross income and tax withholdings were for the previous year.
How is it filed?
Typically, W-4 forms are not filed with the IRS. Instead, they are kept in the employer’s record.
W-2 forms, on the other hand, must be filed with the IRS and sent to each employee.
What About Independent Contractors?
W-2 and W-4 forms are reserved for full- and part-time employees. If you’re working with an independent contractor, things will work a little differently.
Once you decide to work with an independent contractor, they should first fill out IRS form W-9, which allows you to get their correct name and taxpayer identification number.
When it is time for your independent contractor to file their tax returns, you will file a 1099-NEC and send them a copy showing their total wages for the tax year.
Demystify Your Taxes
Understanding taxes and the associated paperwork can be overwhelming, especially if you’re just getting your business off the ground. That’s where having a dedicated tax specialist can help.
At Optimizing Alpha, we can guide you through the ever-changing world of taxes, whether you’re a business owner, an independent contractor, or an individual trying to make sense of your tax return.
Our commitment to 100% accuracy and year-round communication means you get the guidance you need to maximize your financial success.
Contact us today to see which of our professional solutions is right for you.
