How Your W-2 Works


Working for the Man means receiving a W-2 form each year to do your taxes.
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There tax rules, regulations and laws about how much you might owe Uncle Sam and when you have to pay him are enough to make a lay person's head spin. Perhaps that's why American heroes like Henry David Thoreau, Al Capone and Wesley Snipes came up with their own solution: They simply refused to pay the tax man. For those of us who aren't too keen on spending time behind bars, however, the fact of the matter is that tax time is coming and -- one way or another -- we're going to have to pay up.

To understand your tax responsibilities, it's important to first familiarize yourself with one of the most basic forms typically used to calculate what you owe (or, in some cases, what the government owes you). A W-2 is a form issued by employers to workers that shows the total amount of money that the worker made on the job over the course of a year, as well as the amount of federal, state and other taxes withheld by the employer to cover the worker's estimated obligations. This information, in turn, is used by the worker to complete a tax return at the end of the year. Employers generally mail W-2s out or make them available electronically by the end of January each year.

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Employers are required by law to mail W-2s to their employees by February 1 each year. In fact, the Internal Revenue Service can fine a business $50 for failing to do so. If you don't receive your form on time, it's a good idea to check with your employer to make sure that it was sent to the correct address. You can also report the matter to the IRS. If the form doesn't turn up, use IRS Form 4852 as a substitute [source: Ansari].

Breaking Down the Boxes

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].

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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].

Other Tax Forms

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].

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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].

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Sources

  • Ansari, Maryam. "What to Do if You Didn't get Your W-2 Forms." FindLaw. Jan. 31, 2013 (Oct. 28, 2014) http://blogs.findlaw.com/law_and_life/2013/01/what-to-do-if-you-didnt-get-your-w-2-forms.html
  • Internal Revenue Service. "1099-MISC, Independent Contractors, and Self-Employed." Jan. 1, 2014 (Oct. 16, 2014) http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/1099-MISC,-Independent-Contractors,-and-Self-Employed/1099-MISC,-Independent-Contractors,-and-Self-Employed-1
  • Internal Revenue Service. "Form W-2, Wage and Tax Statement." Dec. 26, 2013 (Oct. 18, 2014) http://www.irs.gov/uac/Form-W-2,-Wage-and-Tax-Statement
  • Internal Revenue Service. "Most Popular Forms & Pubs." Jan. 29, 2014 (Oct. 28, 2014) http://www.irs.gov/uac/Forms,-Publications,-and-Other-Tax-Products
  • TurboTax. "What is a W-2 Form?" 2014 (Oct. 18, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/What-is-a-W-2-Form-/INF14812.html