W4 vs W2- What, Where & When To Use Them?
By Davis Clarkson , November 10 2020
You may be wondering how to compare your W4 vs W2 forms. They're both IRS forms that have to do with taxes, but what makes them different? Can one exist without the other? Do they have anything to do with your pay stubs? What's their reason and rhyme? Most importantly, how does each of them affect me?
You wouldn't be the first to ask "what's the difference between a W2 and W4?" If you're trying to figure out which one is which, how they work, and who's responsible for each, keep reading to know the difference.
W4 vs W2 Form What's the Difference?
If you have a job—not including contract or freelance work—then you've most likely come across both a W2 and W4 form. To answer one of the above questions—no. One of these documents cannot exist without the other. Generally speaking, these are what are called input and output documents. Your employer uses the W4 form to record and calculate their employee's payroll deductions.
The W2 form is the document that the employer uses to report the wages for their individual employees each year. Both the W2 and W4 are necessary for living and working legally in the United States.
The Purpose Of The W4 Form
What really is the difference between a form W2 vs W4? Simply put, the W4 form serves as the input document. Usually, when you're starting a new job, you're required to fill out a Form W4. In this form, you'll fill out your legal name, social security number, and allowance withholding information. This form is then used for payroll purposes.
More specifically, the W4 is used to calculate your federal income taxes to be withheld from each paycheck. The money withheld is different for each employee. These are the determining factors:
- Your marital status
- Your dependents, if any. (Pets don't count)
Your allowance refers to a number which clarifies your applicable tax rate. The W-4 form includes calculation instructions, but the general consensus is that the higher the number, the less tax that gets withheld from each paycheck. Your allowance is directly related to the number of people in your household.
Each dependant counts as one, so if you have a wife/husband and two kids—including yourself—you can claim four allowances. If it's just you and your cat, you can only claim one allowance. You can claim exemptions on your W-4 if your wages don't have a tax liability. In other words, if you won't be owing any money to the Internal Revenue Service (IRS) in terms of tax debt, then you can claim an exemption.
Your tax liability is directly related to the federal tax rate and your gross income. So, in order to claim an exemption, you would have to earn less than your expected standard deduction. You can visit the IRS government website for further instructions on claiming a tax exemption on your W-4 form. Your W-4 form can change frequently during your course of employment.
Each time you undergo a status change, i.e., married, single, babies, etc., your W-4 is amended and refiled.
The Purpose Of The W-2 Form
Your W2 form serves as an output document. It's also referred to as a Wage and Tax statement. Your form W-2 will have your legal name, social security number, status, and employer information. It will also have a breakdown of your wages and deductions for your employment of that year. (this includes your Social Security, Medicare, and federal income tax).
Your employer has until January 31st of each new year to send out the W-2 that summarizes your employment for that previous year. So, by January 31, 2020, your 2019 Wage and Tax Statement should be sent out. Your W-2s are sent out to the IRS and state taxing authority. You also get a copy to file with your tax returns. Your W-2 form determines the amount of money you get back during tax season.
These forms come around once a year, while W-4s are only required for new hires and status changes.
What If I'm A Contract Worker?
If you work freelance/as a contractor, your tax filing requirements will look a bit different. For instance, there will be no W-2 or W-4 forms in your life. Instead, there will be a 1099 MISC form for you to file. 1099, for short. Your proof of income will also look a bit different. As a freelancer, you're responsible for paying your estimated taxes quarterly. You can pay each tax season, but it'll be a greater sum of money.
The threshold for paying freelance—or self-employment—taxes is $400. Once you earn that amount or more, you're responsible for paying income tax. Your employer or clients, on the other hand, only have to send you a 1099 financial statement if they've paid you $600 or more. This is to declare your income to keep a record of what you've been paid.
As a 1099 freelancer, you can deduct anything that you use for business. This includes:
- Office supplies—including your desk and chair
- Gas and mileage*
- Domain and website hosting
- Advertising costs
- Software and application subscriptions
- Your mortgage or rent*
All of these things MUST be justified by receipts. With those receipts, there should be documentation of the reason behind the deduction. For example, if you're taking a client out to lunch, you'll want to keep the receipt and make a note of its purpose. In terms of your mortgage or rent, you can likely deduct a partial amount of it if you have a designated home office.
No, your bed doesn't count as a desk. You can check with the IRS to see if you qualify and how you can calculate this deduction. If you're a first-time freelancer, not having to worry about the difference between W2 and W4 forms is exciting! Good for you, however, it can be a bit tricky, so you should really work with a tax professional your first time around to avoid any mistakes.
Your Tax Refund Is Not A Gift
Keep in mind that the money you get back during tax season is not a present from the government. It's a percentage of what you've earned throughout the year. So, when it comes down to W4 vs W2 forms, worry about filling them out and filing them correctly. If you need some more help or information on a W2 form, check out our FAQ section and find out how you can create your own Form W-2 correctly & easily!