Sometimes, taxpayers are unclear on the differences between various IRS forms – especially when they have similar alphabet-numerical names. Two such forms are the W-2 and the W-4. People often mistakenly use them interchangeably, but they’re not the same. One form is used to report your earnings and taxes withheld for the year, while the other defines how much to withhold from each paycheck to pay for taxes.
Differences Between a W-2 and a W-4
While the name of these two IRS forms are quite similar, the forms themselves are not. How you fill out your W-4 can affect your W-2, but they’re two different forms that serve two different purposes. You fill out IRS Form W-4, Employee's Withholding Allowance Certificate, when you start a new job or when situations in your life change such as marital status, or the birth of a new child. You can update your W-4 at any time and submit a new form to your employer. This is the form you use to calculate the number of dependents you wish to claim, not IRS Form W-2, Wage and Tax Statement.
The changes you make on your W-4 take effect immediately and impact how much in taxes your employer will withhold from each paycheck. On your W-4, you will work through a Personal Allowances Worksheet that walks you through how many allowances you can claim. You’re able to claim one allowance for yourself, your spouse and each eligible dependent. You can also claim an allowance for filing head of household status, and if you're planning to itemize or claim certain tax credits.
On the other hand, form W-2 is a reporting of your wages as well as federal, state and other taxes you paid throughout the year. The IRS requires employers to send this form to their employees by January 31 of the new year so workers can file their taxes on time. You then take the information reported on the W-2 to help you fill out your tax return. Although the allowances you claimed on your W-4 impact what is reported on your W-2 (because your allowances determine how much taxes you have withheld) you cannot calculate the number of dependents on a W-2. A W-2 is strictly for your employer to report the amount of income you earned for the year and how much tax was withheld; it is not a form for determining your allowances. You do this on IRS Form W-4.
Determining Allowances on Your W-4
On your W-4 you will notice an attached Personal Allowances Worksheet. To determine the number of allowances you can claim, work through lines A – G, adding a “1” for each allowance you are eligible to claim. You then total all of the previous lines, and enter this figure on line H. This number is how many allowances you claim, and it impacts how large or small your paycheck will be.
The more allowances you claim, the less you pay in taxes per pay period, but this increases the likelihood you will owe the IRS at tax time. The less allowances you take, the more likely you are to receive a refund at tax time, barring any outstanding obligations like owing back taxes or past-due child support. You can structure your withholdings anyway you see fit, as long as you qualify to claim them. For instance, just because you’re eligible to claim six allowances based on your personal situation, does not mean you must take all six allowances if you feel this will cause you to have too little tax withheld.
Some taxpayers prefer to take home more money each paycheck, and invest or spend it as they wish, while others would rather overpay the IRS in anticipation of a refund. You can claim as many or as few dependents and allowances as you want to structure your withholdings in the best way for your individual situation. Consulting with a qualified tax professional can help determine the best strategy for the number of allowances to take. You can also use the IRS’ withholding calculator to help determine how many allowances you are eligible to claim.
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