Form W-2, officially known as the "Wage and Tax Statement" in the American tax system, plays an important role in the financial life of every employee in the United States. It is the document that allows you to file your income tax return correctly.
The most Important in a Nutshell
- The W-2 form is an important document in the U.S. tax system and requires a deep understanding to file taxes correctly and maximize potential deductions.
- It is issued by the IRS, handed out by the employer and provides employees and the tax authorities with an overview of income and taxes withheld in the previous year.
- Form W-2 contains various fields with information on income, deductions and taxes Taxes at federal and state level, which are broken down in detail.
- Modern technologies can be used to optimize further processing. Konfuzio has developed a solution to simplify the process of extracting data from W-2 forms and minimize errors. Read more here.
What is the W-2 form?
Form W-2 is a standard tax form. It is used exclusively in the United States and is issued by the IRS (Internal Revenue Service). Officially known as Wage and Tax Statement the W-2 form forms the basis for accurate income reporting. The purpose of filing tax returns is to provide employees and the tax authorities with a clear overview of the income earned and taxes withheld in the last financial year.
At the beginning of the year, employers issue Form W-2 to their employees. Employees use Form W-2 to file their federal and state income tax returns. If you have opted to receive an electronic W-2, you can usually find it in your employee self-service portal. Otherwise, a paper copy will be mailed to your home address. The form itself is divided into different fields, each of which contains specific information about the employee's income, deductions and taxes. More information on this later.
Processing stages Form W-2
After completing the form, the employer receives the W-2 form back, completes the information and submits the document to the IRS, the United States Internal Revenue Service. The authority uses the information provided to determine the tax liability and possible refunds. The following list illustrates the different users of the W-2 form and summarizes their responsibilities:
Employees - Every employed person in the United States who receives a salary, wages or tips is entitled to a Form W-2. This form is essential for employees to report their income when filing their tax returns.
Employer - Employers are responsible for issuing the W-2 form to their employees. They must also send a copy to the Social Security Administration (SSA) for safekeeping.
IRS (Internal Revenue Service) - The IRS uses Form W-2 to reconcile income reported by taxpayers with income reported by employers, which in turn helps ensure tax compliance.
Tax authorities of the federal states - State tax authorities also rely on Form W-2 to verify the reporting and withholding of state income taxes.
Components Form W-2
The W-2 form contains important information about the employee and the employer. Income and remuneration are recorded in fields 1 to 10 - including total income subject to federal tax - and federal tax withheld.
Fields 11 to 14 contain information on deductions and benefits, such as pension contributions and health insurance premiums. Fields 15 to 20 relate to state and local taxes, including state income and state income tax withheld.
The illustration (Source: University of Wisconsin, Shared Services) provides you with a supporting tool for completing the form:
Breakdown of the fields with description
Descriptions of the most relevant fields can be found in the table below:
| Field no. | Product name | Brief description |
|---|---|---|
| 1 | Wages, tips, other remuneration | Total taxable income for the year, including wages, salaries, tips and other forms of remuneration such as bonuses and awards. Deductions are made for pre-tax contributions, e.g. to pension accounts and health insurance. |
| 2 | Federal income tax of the employer | The amount that your employer withholds from your salary for federal tax purposes. |
| 3 | Wages subject to social security contributions | Income subject to social security tax. The cap was $137,700 in 2020, and certain retirement contributions do not reduce this figure. |
| 4 | Withheld social security tax | Total amount of social security tax withheld from your income. For example, the rate in 2020 was 6.2 %. |
| 5 | Medicare wages and tips | Income subject to Medicare tax, with no income cap. |
| 6 | Medicare tax withheld | Amount of Medicare tax withheld, usually 1.45 %, with a possible additional Medicare tax for higher earners. |
| 7 | Tips (reported) | Amount you have reported as a tip. |
| 8 | Tips (from the employer) | Amount your employer has declared as tips paid to you. |
| 9 | Tax advantage that no longer exists | This field was used to indicate a tax benefit that no longer exists, so it is left blank. |
| 10 | Benefits for dependants | Amount you have contributed to a flexible account for the care of relatives via your employer. |
| 11 | Deferred compensation (non-qualified plan) | Amount of deferred compensation you received from your employer in a nonqualified plan. |
| 12 | Codes and contributions | Contains various codes for additional income or tax deferrals, such as contributions to retirement plans and employer-sponsored health insurance costs. |
| 13 | Retirement plan | Indicates whether you are covered by a retirement plan at work, which affects your IRA contribution deductions. |
| 14 | Miscellaneous | May include a variety of additional tax information, such as taxes withheld for state disability insurance and union dues. |
| 15 – 20 | State and local taxes | These fields show income and withholdings related to state and local income taxes, including wages, tips and amounts withheld for these areas. |
Deadlines for the W-2 form
Employers and employees must adhere to certain deadlines with regard to handing over, completing and submitting the W-2 form:
- Deadline for employers - Employers are required to provide their employees with Form W-2 by January 31 of the following year. This deadline ensures that employees have sufficient time to prepare and submit their tax returns.
- Deadline for submission by employees - Employees must include their W-2 information on their federal tax return, which is due April 15, or the next business day if it falls on a weekend or holiday.
- Deadlines of the federal states - State filing deadlines may vary, so it is important to check with the appropriate state taxing authority for specific requirements.
Facts beyond the W-2 basics
Beyond basic knowledge, understanding about Form W-2 becomes more complex. Some aspects include:
The Form W-2 Variations and Correction
Certain situations may result in Form W-2 discrepancies. For example, employees who are entitled to non-cash benefits such as stock options may receive additional forms such as Form 3922 or Form 1099-B. Employers are also authorized to issue corrected W-2 forms if errors are discovered after the initial filing.
Employer reporting obligations and promotion of electronic submission
Employers need to be well versed in reporting requirements, such as the need to report certain benefits like group life insurance or non-qualified deferred compensation. Failure to comply with these rules can lead to penalties and audits.
The IRS promotes the Digital submission of Form W-2 for employers, which is mandatory for those with 250 or more forms. Electronic filing simplifies the process and reduces the risk of errors.
State and local aspects
Although Form W-2 primarily addresses federal tax reporting, employers must also consider state and local tax obligations. This includes specific forms and requirements that differ from federal standards.
Benefits in kind and tax implications
Employers must report various benefits in kind on Form W-2, such as the private use of a company car, which is subject to special valuation and reporting regulations.
Employees should be aware of the tax implications of their Form W-2. For example, understanding the impact of pre-tax deductions on taxable income and calculating tax liabilities can help individuals better plan their finances.
Difference to IRS Form W-4
The W-4 form bears the official title Employee's Withholding Allowance Certificate. This is also a standard IRS form and is used by employees to provide the employer with important information such as tax identification number (usually the social security number), marital status, number of exemptions and dependents. This helps the employer determine how much income tax to withhold from each paycheck. Employees complete the W-4 when they are first hired or when there are changes in their tax status or the amounts required to be withheld.
Information for companies and authorities
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Find out more about how you can use state-of-the-art technologies such as Artificial Intelligence (AI), Machine Learning (ML) and Optical Character Recognition (OCR) can save both time and resources and significantly minimize the risk of errors when processing and evaluating the W-2.
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Conclusion
Form W-2 is a basic document for employees and employers in the United States. It provides an overview of annual income and tax deductions. From basic knowledge to specialized knowledge, understanding Form W-2 is essential to U.S. tax liability and financial planning. Employers and employees alike must be diligent to meet deadlines and comply with federal, state and local reporting requirements.
By understanding and mastering the intricacies of Form W-2, you too will be able to navigate the complexities of taxation with confidence and accuracy.
Tax season is also a particularly challenging time for many businesses and government agencies as they grapple with the tedious task of extracting data from IRS W-2 forms as part of their processing and analysis.
FAQ
Generally, you will receive a W-2 form from an employer if you have earned at least $600 during a given year. A W-2 is also issued if your employer has withheld taxes from your earnings. It is important to note that if you work as an independent contractor and are not employed as a regular employee, you will likely receive a Form 1099 instead of a W-2 form.
If your W-2 form is available online, you can access it at any time. If you lose your password or login information for the online platform, you can usually request an automatic password recovery. If you still need assistance accessing your information online or would like to request a physical copy, you should contact your payroll or human resources department.
The amount may differ due to input tax deductions such as pension contributions, health insurance contributions and other similar input tax benefits that reduce your taxable income.
Yes, certain employees, such as students working at universities or foreign nationals staying in the U.S. under certain visa categories, may be exempt from some taxes.
If you have worked in multiple states, the income and taxes from each state will be listed separately on your W-2.
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