What is a W-2?

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A W-2 is a form filed by an employer that shows compensation paid and amounts withheld from an employee’s paycheck. Compensation includes wages, tips, and other forms of compensation.

Withholding can include taxes and other amounts deducted from an employee’s pay. If you have more than one employer, you may receive multiple W-2 forms. These forms are essential documents in filing your taxes for the previous year.

The W-2 is generated based on an employee’s income during each calendar year, as well as the information the employee provided on their W-4 withholding certificate. Understanding how to read your W-2 can be helpful in understanding your overall tax liability.

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What Information Is on a W-2?

What is a W-2?

All W-2 forms require the same information, regardless of employer. This information includes key employer information, such as business address and employer identification number (EIN). It also includes the employee’s information, such as social security number and mailing address. Assess the form for any errors; if you see an error, contact your employer for a corrected form.

The W-2 has boxes that display various information. Box 1 displays the employee’s total wages, tips, and other compensation for the year. Box 3, 5, and 7 display wages and/or tips in regard to social security and Medicare, which is a portion of an employee’s overall wages.

Boxes 2, 4, and 6 display amounts withheld for federal income tax, Social Security tax, and Medicare tax, respectively. Boxes 15-20 at the bottom of the form will display state and local income tax amounts withheld, if applicable.

Employees receive multiple copies of the same W-2 from each employer, to be filed with a federal tax return, a state tax return, and to be kept for the employee’s records. The IRS recommends keeping copies of W-2s for at least six years in case they contact you.

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The Connection Between a W-2 and a W-4

What is a W-2?

A new employee will be asked by their employer to fill out a W-4 form, which is used to assess how much tax to withhold from the employee’s wages. Withholding depends on the employee’s circumstances, including whether they have dependents and what their tax filing status is, among other things.

Employees who do not fill out a W-4 will be taxed as if they were single.

Employees won’t be asked to complete a W-4 form again unless they switch employers. An employee must take initiative and fill out a new W-4 if their tax circumstances change, such as getting married, having a child, or receiving taxable income not subject to withholding, such as earning money from a contract or freelance job.

Each allowance an employee claims on their W-4 will minimize withholding throughout the year. An employee can also request additional amounts be withheld from their paycheck. When taxes are filed, the goal for employees is to avoid a tax bill or a large refund, both of which can indicate that your tax payments during the year were off the mark.

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How do you know that your W-4 is accurate?

What is a W-2?

While “tax time” is in April each year (though the IRS has extended it to mid-May in 2021), taxes are essentially pay-as-you-go, according to the IRS. That means that, in an ideal world, April shouldn’t bring a large tax bill or a large refund.

For a single person who has only one employer, filling out a W-4 should be relatively straightforward. But those with multiple income streams, including rental income, investment income, or income from side gigs, may need to take some time with their W-4 to ensure they’re withholding an appropriate amount, as well as paying quarterly estimated taxes if necessary.

How do you know that your W-4 is accurate? You can assess based on the refund or bill you receive at tax time. While a refund can feel like a windfall — and people often earmark it to pay off bills or fund a vacation, home improvement project, or other big-ticket purchase — the money represents an overpayment to the IRS.

While getting a big check can be exciting, it may make more sense to have that money available to budget throughout the year. Similarly, a large tax bill can throw your budget off track and may subject you to penalties from the IRS for not having enough taxes withheld from your paycheck or not paying quarterly taxes.

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Are You an Employer?

What is a W-2?

If you pay someone wages of $600 or more in a calendar year, even if that person is a relative, you’re technically an employer in the eyes of the IRS. This means that a person who employs a regular babysitter or housecleaner may need to withhold and pay certain taxes, including Medicare, federal unemployment, and social security.

This is an example of paying someone “on the books” and can be protection from fines and penalties that may come from paying an employee “under the table.” Having a clear understanding of what forms need to be filled out and what steps you need to take as an employer can help avoid a potentially complicated tax situation down the line.

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Having Your Paperwork in Order

What is a W-2?

Because things can change from year to year, it can be a good idea for an employee to regularly check their withholding on their W-4 every year and make sure a new one is filed if there is a life change, such as having a baby or getting married. It’s also a good idea for employees to keep an eye out for tax-related paperwork since tax is due regardless of whether paperwork has made its way to an employer’s mailbox.

Checking in with an HR department can help make sure nothing falls through the cracks. Having paperwork ready and available can make filing taxes as seamless as possible when the time comes. Having your paperwork ready and considering any questions you may have can also maximize your time if you work with a tax prep professional.

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The Takeaway

What is a W-2?

While tax time may be met with eye-rolling and stress, it can also be a time to set up financial intentions and systems for the year. This can include submitting a new W-4 to your employer, estimating quarterly taxes, and developing a strategy to ensure that your money works for you in the year ahead.

Keeping on top of your finances throughout the year can make tax time more manageable.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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