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A Guide to W2 & W4 Forms For Your Small Business

Here is a simple breakdown of IRS forms W2 and W4. The article explains how to use them and why they are important for your small business.

As a creative person, running your own business can fulfill your dream of giving your art a bigger platform. However, managing a business takes a lot of time and effort, which you often realize after you're well into the game. There are statutory requirements to be fulfilled, insurances to be taken, and other procedures to be followed.

It is a learning curve that every business owner has to go through. However, when you have employees, the responsibility increases even more. You have the additional responsibility of managing IRS documents to fulfill tax liabilities.

W2 and W4 are two such tax documents that you will have to manage while processing your employees' payroll. When you are new to it, both of them could seem the same, and you may wonder what makes the two forms different.

What Is the Difference Between W2 and W4?

W4 is a form that the employee must fill in while the employer uses it to calculate the income tax they should withhold from the employee's pay. Form W2 reports the salary paid to the employees the previous year and the tax the employer has withheld.

What Is a W4 Tax Form?

Form W4 is the Employee's Withholding Allowance Certificate. It is one of the first forms you ask a new employee to fill out when joining you. It gives you information about how much tax you can withhold from their salary.

As the owner, it is your responsibility to ensure that you get the form completed and signed on the day or before an employee joins you.

Here is the information that Form W4 can provide about an employee's taxation -

  • It tells you the rate you should follow while withholding income tax from an employee's pay. W4 tells you whether to follow the rate for a single or married individual.
  • You will get to know how many withholding allowances the employee claims. As each allowance reduces the amount you should withhold, it allows for accurate tax calculations.
  • Some employees may claim to be exempt from withholding any amount, while others may want you to withhold an extra amount. Form W4 gives you all this information.

An employee who filled form W4 at their previous workplace still needs to fill it out at their new one. There is no exception even if an employee claims to be exempt from withholding.

If you do not have a completed Form W4 from the employee, you will need to withhold income tax as if the employee is single. It would mean there would be no withholding allowances. You will have to withhold the largest amount from your employee's pay unless you receive a fully-filled Form W4.

At times, an employee can make financial decisions that can impact their taxation. In such scenarios, it is their responsibility to update the Form W4 and share it with you. Until they do, you can continue computing the taxes with the information you currently have.

Moreover, as an employer, you do not have to verify the allowance exemptions the employee claims.

What Do You Need Form W2 For?

Form W2 is the Wage and Tax Statement. This form contains the information about the salary paid and taxes that you have withheld for an employee. As an employer, you will need to file it every year.

As the owner of a business that employs various people, it is your responsibility to file a separate Form W2 for each employee. This is regardless of how you pay them and the amount paid. If you have employed family members in your business, you need to file W2 forms for them too.

As a creative person who has ventured into business, filling out Form W2 can be a challenge, This is because you also have to account for non-cash compensations. For instance, dependent care assistance benefits, scholarships, employer-provided group-term life insurance, tips, etc.

If you are planning to start a small business, Understand different types of startup expenses which will help you launch successfully.

Your Cheatsheet for W2 and W4

If you are still unclear about the differences between Forms W2 and W4, here is your cheatsheet to ward off any confusion.

Who Fills Out the Form?

Form W4: It is the responsibility of your employees to fill out Form W4. Ideally, they should do it before or on the first day of joining your business. However, it is alright even if they give it to you within the first month of their employment.

Form W2: Filling out and filing W2 to the IRS is the employer's responsibility. As the business owner, you will also have to provide a copy of the W2 to your employees at the end of the year. You will have to do it for every employee that you have paid $600 or more in the previous financial year.

What Is the Purpose of These Forms?

Form W4: This form tells you how much tax you should withhold from an employee’s salary and submit the same to the IRS. The amount can depend on multiple factors, such as the employee’s marital status, number of dependents, and withholding preferences.

Form W2: This form contains information on an employee’s total earnings. It should also include federal tax contributions, Medicare tax, and Social Security tax. If an employee has opted for additional withholdings, such as voluntary contributions to retirement plans, this information should also be mentioned in the W2.

When Are They Submitted?

Form W4: Apart from filling out a fresh Form W4 when starting a new job, the employees should also fill out the form again when their financial situation changes.

Form W2: Employers have to share a copy of Form W2 with their employees and the IRS by January 31.

What Are the Instructions to Fill Forms W2 and W4?

Form W4: While filling this form, the employees will have to share personal information. They will also need to specify if they are married and filing their taxes separately. Moreover, the employees will have to mention the number of claims they will make and if they want any additional amount to be withheld.

Form W2: As an employer, you will have to mention your employee’s Social Security number and the business' Employer Identification Number (EIN) while filling out Form W2. Moreover, you will have to provide the employee’s total income for the year, the amount of federal income tax, Social Security tax, and Medicare tax that you have withheld. The amount that you have withheld will determine if the employee needs to pay an additional amount or can get a refund from the state.

Using Form 2533 to save small business taxes which will notify the corporation that the fee is due.

In Conclusion

Completing and filing W2 and W4 forms are essential when you run a business. However, payroll taxes can be complicated. Moreover, you may not have the bandwidth to do them yourself.

To make the process smoother, you can consider working with accountants and tax consultants who can take these responsibilities off your plate so that you're free to focus on making your business more profitable.

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