What is Form W-2 and Its Purpose?

W-2 Form Understanding

In simple terms, Form W-2 allows employees, employers, and the IRS to track earnings and taxes. 

This key process in taxation shows all the money that a person earned and also shows all the taxes that your employer took from your pay in a particular year. 

As a W-2 employee, your taxes are managed by your employer. They deduct the money for taxes directly from your paycheck and send it to the government. Form W-2 eases this process, and legalizes it so they can file your taxes correctly.

What Is Form W-2?

Form W-2 is the Wage and Tax Statement employers issue annually to their employees. This report will indicate the sum earned and the amount of tax withheld on their salary. 

For example, in 2023, if you worked at any given company, then in January 2024, you should receive your W-2 from your employer showing you:

• Your total earnings for the year
• How much tax was withheld for federal, state, and local taxes

Who Needs a Form W-2?

Employers must file a W-2 form for every employee paid $600 or more during the year. 

This includes wages, salaries, or other payments, even if the worker is a family member. 

It is used by employers, employees, the IRS, and state and local tax authorities. 

• Employers send W-2 forms to report wages and taxes to the IRS, Social Security Administration, and state authorities. 
• Employees use it to file their federal and state tax returns. 
• The IRS uses it to check tax liabilities and refunds. 
• State and local tax authorities use W-2 forms to track income and taxes for state and local tax purposes.

A difference that might impact taxes lies in distinguishing a W-2 vs. a 1099 employee. In that respect, it is necessary to determine in which category you fall so that you may manage your taxes appropriately. 

For example, if a company pays you $20,000 in wages and withholds taxes from your paycheck, you will receive a W-2 form. 

However, if you are self-employed or work as an independent contractor, you do not get a W-2. Instead, you use a different tax form, like Form 1099.

When Is Form W-2 Issued?

The employers should post Form W-2 to their employees by January 31 every year. 

This period provides the employee ample time so that they may file an early return for income taxes filing deadline of April 15th.

Now, let’s look at what is the purpose of a w2 form.

What Is the Purpose of Form W-2?

The purpose of a W-2 Form is unimaginably vast. It is essential because it helps report an employee's earnings and the amount of tax withheld from their pay. 

It also shows important information like wages, bonuses, and taxes paid for Social Security and Medicare. 

These forms help report Social Security and Medicare taxes, often called FICA taxes. 

Employers send these forms and Form W-3 to the Social Security Administration (SSA) by the end of January.

Tax Filing and Compliance

The W2 form understanding also aids in filing accurate returns through it as it indicates what is being earned and how much is deducted as tax.

The amount is $30,000 earned but $5,000 taxes withheld. The W-2 will show both amounts and help employees report the proper amount of income and avoid either under or overpaying taxes. 

This serves as a verification check of the taxes reported on return by the IRS to compare with the taxes already submitted by your employer to prevent loss of tax compliance.

Verification of Earnings and Withholdings

Form W-2 breaks down your wages, taxes withheld, and any benefits, such as Social Security and Medicare contributions. 

For example, it will show if your employer withheld $2,000 in federal tax, $1,500 in state tax, and $1,000 for Social Security. 

This detailed information helps employees keep accurate records and makes tracking their income and tax history easier over time.

Beyond Taxes: Financial and Legal Use

Form W-2 is also used for more than just taxes. Lenders and employers may ask for your W-2 to verify your income when applying for loans, mortgages, or new jobs. 

For example, if you are applying for a mortgage, the bank may want to see your W-2 to ensure you have a steady income to repay the loan. 

This form helps with financial planning and legal verifications, making it an important document beyond tax season.

It is different from the W-4 form, which employees must fill out to determine how much tax should be withheld from their paychecks. 

Understand the difference between the W-4 vs W-2 forms before you manage your tax situation.

Breaking Down the Components of Form W-2

A W-2 form has many important sections. Learning a sample W-2 is how you get your taxes filed in the right way. 

There are 20 boxes in total. Each section provides the information the IRS needs.

Wages and Withholdings

Boxes 1, 3, and 5 show your taxable earnings for federal, Social Security, and Medicare taxes. Boxes 2, 4, and 6 show how much tax was taken out for these. 

Here is a detailed table for this:

Verify these numbers so that your withholdings are accurate and you can compute any overpayments or underpayments you might have to make.

State and Local Taxes

Some states and local areas require income taxes in addition to federal taxes. This information is shown in boxes 15 through 20 on the W-2 form. 

Box 15 includes the state or local wages subject to income tax, while Box 16 shows the state income tax withheld. If applicable, Box 17 displays the amount of local income tax withheld, and Box 18 shows local wages. This information ensures employees comply with their state and local tax obligations.

Additional Benefits and Contributions

Form W-2 includes important information about international business challenges, benefits, and contributions in different boxes.

• Box 7 shows tips earned by the employee, which are subject to federal income tax.
• Box 12 uses specific codes to report retirement plan contributions, such as 401(k) deductions. These contributions can reduce taxable income.
• Box 14 may also include other compensation, such as union dues, uniform allowances, or other employer benefits.

Employer Responsibilities for Form W-2

You must complete a W-2 form for each U.S.-based employee as an employer. You need to make four to six copies of each W-2. Employees who work for multiple employers may receive several W-2 forms, but you only need to submit one set of copies for each employee. 

Here is what each copy is for:

• Copy A: Send this to the Social Security Administration (SSA).
• Copy B: Your employee files this copy with their tax return.
• Copy C: Your employee keeps this copy for their records.
• Copy D: You keep this copy for your records.
• Copy 1: Send this to state tax authorities (if required).
• Copy 2: Your employee sends this to state tax authorities with their tax return (if required).

Filing Deadlines and Requirements

The due date for filing Form W-2 is 31 January the following year. If 31 January falls on a Saturday or Sunday, the due date is moved to the next business day. 

W-2 forms must also be submitted to the SSA using Form W-3. If you are sending 10 or more Forms W-2, you file them electronically.

If you cannot comply with the deadline for filing, you can claim a 30-day automatic extension using Form 8809. A valid reason for seeking an extension includes a natural disaster, being absent through injury or death of key personnel, or in case you are a new filer. 

Failure to file or distribute W-2 forms properly and timely may make you liable to penalties with a delay in processing.

Common Errors and How to Avoid Them

Filing Form W-2 incorrectly can lead to penalties. Common mistakes include:

• Failing to file on time: You could face a penalty if you miss the deadline.
• Missing required information: Ensure all fields on the form are filled out correctly.
• Incorrect information: Double-check names, Social Security numbers, and tax details.
• Incorrect SSN or EIN: Double-check the Social Security Number (SSN) or Employer Identification Number (EIN) to avoid errors with the IRS or state records.
• Miscalculated wages: Compare the wages listed on your W-2 with your payroll records to ensure they match.
• Ignoring Box 12 codes: Box 12 contains important information, such as retirement plan contributions or sick pay, so don’t overlook these codes.‍
• Mistakes in withholding amounts: Check your paycheck stubs to ensure the taxes withheld match what’s shown on your W-2. This helps avoid unexpected tax bills or discrepancies.

The Importance of Accuracy in Form W-2

The accuracy of Form W-2 is very important to employees and employers alike. Mistakes on the form will delay the filing of taxes and might even incur penalties. To employees, this may mean that their tax refunds may be affected or that their financial applications might be disapproved. For employers, mistakes on W-2s might incur fines and legal cases.

For Employees

Errors on your W-2 can cause problems with your tax return. If your income or tax withheld is wrong, it can delay your refund. Mistakes may also cause issues when applying for loans or mortgages. If the IRS finds discrepancies, you could face an audit.

For Employers

Employers who provide the wrong W-2 forms have to pay fines. The IRS also imposes penalties for late or incomplete filing. Legal problems may also rise in case of failure in reporting taxes. 

All the details must be correct to prevent these problems.

However, the consequences are different if employers use an independent contractor checklist. Misclassifying the workers can bring more penalties and compliance problems. 

So, check all the details before filing.

How to Use Form W-2 as an Employee

Each box on the W-2 form purpose is specific and provides the information needed to file your tax return. 

Understanding each box's meaning can help you avoid errors and ensure your taxes are filed correctly. 

Below is a simple breakdown of the boxes on Form W-2 to make it easier to read and use.

Understanding Key Sections

With the W2 filling, you must understand key factors and sections well. 

Get a good look at your:

• Wages and compensation: Your total wages for the year are in Box 1 of Form W-2. This shows the amount you earned that is subject to federal income tax. It includes your salary, tips, and bonuses but excludes pre-tax deductions like retirement contributions.

• Federal tax withheld: Box 2 shows how much federal income tax was taken from your paychecks throughout the year. This amount helps determine if you get a refund or owe taxes.

• Social Security and Medicare taxes: Boxes 3 and 5 display wages subject to Social Security and Medicare taxes. These amounts might be higher than those in Box 1 since pre-tax benefits like 401(k) contributions are not exempt.

• Taxes withheld for Social Security and Medicare: Boxes 4 and 6 show the exact amounts deducted for Social Security and Medicare taxes. Social Security tax is 6.2% of wages (up to $168,600 in 2024), and Medicare tax is 1.45%.

Filing Taxes with Form W-2

You can file taxes using your Form W-2 easily. The methods involve doing it manually or by using tax software. 

Read on for some valuable tips in doing this so that errors will be avoided.

• Verify everything written on Form W-2: Double-check your name, Social Security number, and amount of wages. You have to contact your employer in case you find an error.
• Carefully enter the details: Enter all your Form W-2 amounts on your tax return, including wages, federal and state income taxes withheld, and Social Security and Medicare taxes.‍
• Use tax software to import information: Tax software allows you to import W-2 data directly, thereby reducing the probability of errors.

Simplifying Payroll and Tax Compliance

Managing payroll and taxes can be tricky, especially with employees in different countries. Skuad helps make the process simple and hassle-free. 

The W-2 payroll means tracking wages and taxes throughout the year. Employers must give W-2 forms to employees and the IRS by January 31. These forms show earnings and taxes withheld. Filing W-2s properly ensures employees can file their taxes accurately and on time.

Skuad handles payroll for businesses with local and global teams. It handles multi-currency payments, taxes, and compliance. 

Our comprehensive EOR ensures that tax forms like W-2s are accurate and meet local legal requirements, reducing the risk of penalties and errors.

We keep your business compliant with changing laws. It also protects sensitive data, ensuring security and privacy. With Skuad managing payroll and compliance, you can focus on growing your business.

Get Tax Season & Form W-2 Right with Skuad

Form W-2 is essential for accurate tax filing and compliance with the law. Errors can lead to penalties for businesses and delays for employees. Managing payroll correctly ensures smooth tax filing and builds trust with your team.

Skuad makes payroll management simple. It handles complex tasks like multi-currency payments, taxes, and benefits. With Skuad, you can focus on growing your business while staying stress-free during tax season.

Your data is safe, secure, and private. Strong legal agreements protect intellectual property. Customize payroll permissions easily and let Skuad handle the hard work. 

From payroll to tax compliance, everything is handled seamlessly. Make tax season hassle-free with Skuad.

‍Book a demo today to simplify your payroll and compliance for your business.

FAQs

1. What is a W2 form used for?

It reports employee wages and tax withholdings, helping employees file accurate tax returns with the IRS.

2. How do I get my W-2 form?

Employers provide W-2 forms by January 31. Employees can receive it via mail, by fax, or request copies directly from their employer.

3. What is the difference between a W-2 and a W-4?

W-2 reports annual wages and taxes withheld, while W-4 determines the amount of tax withheld from employee paychecks.

4. Who needs to file a W-2?

Employers must file W-2 forms for all employees earning $600 or more annually or with any withheld taxes.