• W-2 vs W-4: What’s the Difference and When to Use Them

    Taxes.  They can make your head spin.  And one of the most challenging features of the US taxation system is the fact that things can change in a heartbeat.

    If you’re new to doing business taxes, you can often feel like Dr. Livingston – hacking your way through the dense underbrush using only a machete.  Fear not.  This post is about W-2 vs W-4:  what’s the difference and when to use them.  It’s just one of the many details we love to share with small businesses like yours so you can stay at the top of your taxation reporting game.

    What Are They?

    The W-2 is used at year-end.  Required by the IRS, this document is used to report on employee income and taxes for the year.

    The W-4 is used by the employer to collate tax withholding information on behalf of employees.

    So, what’s the difference, technically speaking?

    Incoming and Outgoing

    The two forms are linked but serve different functions.

    The W-2 is an employer-generated document provided to employees.  Gross pay for the year is detailed on this form and details about tax deductions for state and local jurisdictions are shown.  It is, therefore, outgoing information.

    The W-4, on the other hand, details incoming information.  The employee uses this form to advise payroll as to how much tax should be withheld from earned income.  It thus informs the eventual W-2 at year-end.

    W-4 gathers information and W-2 provides the same information, accumulated over the year, to the IRS.

    Withholding Allowance Certificate – W-4

    Every new hire should receive this form upon hiring, completing it in time for the first pay period on staff.

    According to information provided by the employee on this form, payroll determines the amount of tax payable at all levels – local, state and federal.

    The W-4 is accompanied by a worksheet with instructions to assist the employee in calculating the correct tax rate (the “allowance”).  This figure correlates to marital status and number of dependents.  A higher number indicates that less tax will be withheld.

    Variances by State

    A number of states employ the W-4 to determine state withholding taxes.  Colorado and Mississippi are just 2.   In states like Texas and Alaska, there’s no state withholding tax, so there’s no form applicable.

    Overall, individual states have their own form for this purpose.  Examples are Georgia and Kentucky.  Be aware of the form protocols in your state or ensure that your employer is.

    Support at Norton Financials

    Do you dream of not having the books on your hands?  Norton Financials can help with that.  When the taxman cometh, you’ll be ready when you have Norton in your corner, keeping your reporting as neat as a pin.

    We take the headache out of your daily accounting needs and streamline your bookkeeping systems, saving your company time and money.  We know you like that idea!

    Finally, if you’re a QuickBooks user, we’re here with QuickBooks consulting that ensures your staff is ready to take it on and run it like superstars.  Contact us.

    Leave a Comment