The W-2 vs. W-4 discussion often comes up when a new hire is onboarding, and it’s time to sort out an employee’s tax responsibilities. Both forms play an important role in the payroll process, but serve different purposes.
What you’ll learn
What you’ll learn
Updated: June 24, 2025
Key takeaways
- Employees fill out the W-4 to inform their employers about their preferred tax withholding
- Employers complete the W-2 to display wage and tax information for employees
- Employers must provide W-2s to employees and file a copy of W-2s to the Social Security Administration (SSA) by January 31 for the prior year
The W-2 reports employee earnings and tax withholdings at the end of the year. The W-4 informs employers about an employee’s withholding preferences. While other payroll tax forms are important, the W-2 and W-4 are foundational to any payroll system. This guide breaks down the purpose of each form, the differences between each one, and outlines employer responsibilities to help you avoid common pitfalls.
What is Form W-2, and what is it used for?
The W-2 tax form, also known as the Wage and Tax Statement, is a document that US employers must provide to their employees by January 31 each year. It summarizes the total wages earned by an employee during the previous year and outlines the federal income tax withheld from their earnings.
It also summarizes any collected Social Security and Medicare taxes. Ultimately, it’s a tool for employees, helping them understand their financial obligations to the federal government.
For small business owners, accurately reporting employee withholdings and distributing the form promptly should be toward the top of your to-do list. Failing to provide timely delivery or incorrectly completing the form can create compliance issues and even lead to some less-than-ideal outcomes (such fines or other penalties).
It can be helpful to think of the W-2 form as a bridge between employees and the federal tax system. Employees use the information on the form to complete their annual tax returns. Any discrepancies between employee reporting and the W-2 can lead to audits, delays in processing refunds, and/or penalties from the IRS.
It is the small business owner’s job to ensure accuracy and manage paperwork so employees have the correct information for filing their taxes.
Now that we better understand how a W-2 fits into the equation, let’s move onto Form W-4.
What is Form W-4, and how does it work?
The W-4 form, or the Employee’s Withholding Certificate, is a document that employees fill out to help their employers understand how much federal income tax should be withheld from each paycheck. The information provided on the form determines the amount of money deducted from an employee’s paycheck to cover income tax obligations.
Unlike the W-2, which reports total wages and taxes withheld at the end of the year, the W-4 is a proactive way for employees to communicate their tax situation to employers.
W-4 form updates should be completed whenever an employee’s personal situation changes — such as marriage, divorce, or the birth of a child — that affects their tax withholdings. Employers should make it a point to request new forms if employees experience any significant changes that affect tax liabilities or obligations.
They’re often lumped together, but the W-2 and W-4 each have distinct roles — and it’s worth knowing how they differ.
Key differences between Form W-2 and Form W-4
W-2s and W-4s often get mentioned in the same breath, but they’re built for very different things. This is mainly framed around purpose, timing, completion, and their respective roles in calculating payroll taxes and reporting federal income taxes.
The purpose of a W-4 is to inform employers about how much they should withhold from an employee’s paycheck for income taxes. In contrast, the W-2’s purpose is to serve as a summary of earnings and tax withholdings.
Regarding timing, employees submit a W-4 form when they start their employment or when they need to make changes due to life events. On the flipside, the W-2 is generated at the end of a tax year and completed by the employer.
The roles of these forms in tax reporting and withholding highlight another difference.
- The W-4 affects the calculation of payroll taxes, helping employers determine the correct amount to withhold from each employee.
- Conversely, the W-2 is more of a record of withholdings. It represents the culmination of the withholding process for the year.
Pro tip
Don’t wait until the first payroll to collect W-4s. Get these forms during the first day of new hire orientation, if possible. Processing payroll without a completed W-4 means you’ll default to the highest withholding rates, which can create employee dissatisfaction with their first paycheck.
How W-2 forms impact employee tax filing and reporting
W-2 forms serve as a comprehensive summary of earnings and withholding, which individuals rely on when completing their income tax returns. The information provided on the form — total wages, tax withholdings, and Social Security and Medicare contributions — plays a big role in shaping an employee’s tax return and overall financial situation.
As different payroll tax deadlines roll around, employers should take time to review W-4 forms to ensure W-2 calculations are accurate for the quarter. That’s right — while employees only file once a year, employers submit quarterly payroll tax returns. But it’s not just any paperwork! Those filings directly affect year-end W-2s and can ultimately impact how much employees owe or get back at tax time.
How W-4 forms determine payroll withholding and take-home pay
The W-4 form directly dictates the amount of payroll tax withholding an employer will deduct from an employee’s wages for federal income tax withholding. As we mentioned earlier, it can be helpful to think of it as the primary communication tool between an employee and their employer regarding how much tax should be set aside from each check. Though it may seem like any other paperwork, getting it right goes a long way because of what it means for an employee’s net take-home pay throughout the year.
When employees complete the form, they provide employers with several pieces of information to help them calculate withholdings. The main information on the W-4 form includes:
- Filing status
- Multiple jobs or an employed spouse
- Dependents
- Other income
- Deductions
- Extra withholdings
It’s worth noting that personal withholding allowances for yourself, your spouse, or dependents are no longer part of the W-4 form. The newer form aims for greater accuracy and transparency with direct dollar amounts for deductions and credits.
However, according to CPA Peggy James, the updated W-4 form can actually create more confusion in practice.
“The IRS updated Form W-4 a few years ago, and in my opinion the form is now more confusing than before. I frequently have clients with a large balance due to the IRS when their tax returns are filed, usually because there’s not enough withheld from their paycheck for federal income taxes.
I see this most often with married couples where both spouses have W-2 jobs. There’s a box to check on Form W-4 to indicate that both spouses are working, but the way the question is worded leads to some confusion about whether they need to check the box. If they don’t, withholding will be low and may not cover their tax liability.”
— Peggy James, CPA
The takeaway? If an employee owes a large amount to Uncle Sam at tax time, Peggy recommends they review their W-4 and, if needed, submit an updated copy to you to ensure their federal withholding is on track.
Common mistakes with W-2 and W-4 forms, and how to avoid them
Mistakes on W-2 and W-4 forms can lead to compliance issues and may impact an employee’s tax return. For example, incorrect W-4s can misalign with withholding tables, affecting withholdings or leading to a federal tax block if they are significantly incorrect.
Other common errors include:
- Name/Social Security number mismatches on W-2s
- Incorrect W-4 withholding information
- Late W-2 submissions
Avoid W-2 deadline penalties, which can range from $60 to $630 per form, depending on how late the filing is made. If there are errors on W-2s, you can file Form W-2c with the Social Security Administration for prompt correction.
What to know about state-specific rules for W-4 compliance
Certain states require employers to use state-specific withholding forms that differ from the federal Form W-4. For example, employees in Minnesota are supposed to complete Form W-4MN so their employer can withhold the correct amount of state income tax. In contrast, Colorado has Form DR 0004 (the Colorado Employee Withholding Certificate) but it’s optional for workers to complete. If an employee doesn’t submit DR 0004, employers are generally expected to base Colorado withholding on the federal Form W-4 instead.
Pro tip
It can be a good idea to keep digital copies of all worker W-4s with timestamps. If the IRS questions withholding calculations, you may need to prove that you followed the employee’s written instructions. A simple scan or photo with the date received can save headaches if there’s ever an audit.
It can be a good idea to check where you are doing business to see if there’s any state-specific withholding documents that need to be taken care of.
W-2 vs. W-4: Employers should be familiar with each form
While W-2 and W-4 forms both relate to employee taxes, they have different roles in the payroll process. On one hand, the W-4 helps you calculate the right amount of tax withholding from each paycheck. On the other? The W-2 reports total wages and taxes withheld for the year. Understanding when and how to use each form keeps new hire onboarding running smoothly and keeps you on top of compliance when tax season is on the horizon.
With proper payroll and tax management systems in place, you can avoid costly compliance and filing errors. OnPay’s payroll software can help you organize tax documents and manage filing schedules without worries. Best wishes as your team grows and you continue navigating tax season successfully!
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.