How Your W-2 Works

The form itself includes a series of boxes with information about the employer, the employee and, of course, the money. In addition to listing the employer's name, address and tax identification number, the form also lists the worker's name and contact information. It's important to make sure this information is correct: you don't want to be on the hook from someone else's tax bill [sources: IRS].

Then there's the really important stuff. The W-2 will tell you how much you made in wages, tips and other compensation over the course of the year. For tip earners, that figure will include the tips that you told your employer about. This amount doesn't include money that you were paid, but isn't yet taxable, such as earnings that go into a 401(k) or qualifying flexible spending plan. The form also includes wages and tip totals used for calculating the worker's Social Security and Medicare tax obligations. The Social Security amount is likely to be lower because only a portion of your earnings are subject to that tax [sources: IRS, TurboTax].

Finally, the W-2 will tell you how much your employer withheld from your regular paychecks in estimated taxes. The idea is to pay as you go, so that workers aren't stuck with a huge tax bill at the end of the year. Heck, you might even get a refund! If you aren't so lucky and wind up owing the tax man a significant chunk of change at the end of the year, you can always ask your employer to take out more money from your paychecks. Do that by reducing the number of the dependents that you claim on your W-4 or by simply listing the additional amount that you want withheld in line 6 of the form [source: TurboTax].

The W-2 may be the most common tax form, but it is far from the only one that individuals and businesses may need to be familiar with. The federal government taxes everything from ordinary employment pay and returns on the sale of stock to income from rental properties and agricultural transactions. If you make money during the year, there is probably a corresponding tax form waiting for you to fill it out.

It all begins with the W-4. This is the form that workers complete to determine how much money should be withheld from their paychecks to cover estimated taxes. The form allows workers to have their withholdings altered based on the number of dependents they claim and to increase withholdings to cover non-taxed earnings from other sources [source: IRS].

In order to get money back from the IRS at the end of the year – or at least avoid being penalized – you also have to file a tax return by April 15. For most folks, that return is a Form 1040, a 1040A, a 1040-ES or a 1040EZ. These documents are completed by a taxpayer or professional and are designed to give a fairly detailed snapshot of the person's income, deductions and credits for the year. Some of that information comes directly from the W-2 or a 1099-MISC [source: IRS].

The 1099-MISC comes into play for self-employed workers and those who have been deemed independent contractors. These workers generally don't have taxes withheld from their earnings and may need to pay estimated taxes on a quarterly basis. The 1099-MISC tracks "nonemployee compensation," as well as income from rent, royalties and the sale of consumer goods [source: IRS].

Rather than completing a W-4, workers and self-employed individuals who receive a 1099-MISC at the end of the year will likely need to complete a W-9 for any individual or entity with which they do business. This "Request for Taxpayer Identification Number and Certification" provides certain info that the receiver uses to later complete and file a 1099 [source: IRS].