A W-2 is a form filed by an employer that shows compensation paid and amounts withheld from an employee’s paycheck. Compensation includes wages, tips, and other forms of compensation. Withholding can include taxes and other amounts deducted from an employee’s pay. If you have more than one employer, you may receive multiple W-2 forms. These forms are essential documents in filing your taxes for the previous year.
The W-2 is generated based on an employee’s income during each calendar year, as well as the information the employee provided on their W-4 withholding certificate. Understanding how to read your W-2 can be helpful in understanding your overall tax liability.
What Information Is on a W-2?
tax time” is in April each year, taxes are essentially pay-as-you-go, according to the IRS. That means that, in an ideal world, April shouldn’t bring a large tax bill or a large refund. For a single person who has only one employer, filling out a W-4 should be relatively straightforward. But those with multiple income streams, including rental income, investment income, or income from side gigs, may need to take some time with their W-4 to ensure they’re withholding an appropriate amount, as well as paying quarterly estimated taxes if necessary.
How do you know that your W-4 is accurate? You can assess based on the refund or bill you receive at tax time. While a refund can feel like a windfall—and people often earmark it to pay off bills or fund a vacation, home improvement project, or other big-ticket purchase—the money represents an overpayment to the IRS. While getting a big check can be exciting, it may make more sense to have that money available to budget with throughout the year. Similarly, a large tax bill can throw your budget off track and may subject you to penalties from the IRS for not having enough taxes withheld from your paycheck or not paying quarterly taxes.
Are You an Employer?
If you pay someone wages of $600 or more in a calendar year, even if that person is a relative, you’re technically an employer in the eyes of the IRS. This means that a person who employs a regular babysitter or housecleaner may need to withhold and pay certain taxes, including Medicare, federal unemployment, and social security.
This is an example of paying someone “on the books” and can be protection from fines and penalties that may come from paying an employee “under the table.” Having a clear understanding of what forms need to be filled out and what steps you need to take as an employer can help avoid a potentially complicated tax situation down the line.
Having Your Paperwork in Order
Because things can change from year to year, it can be a good idea for an employee to regularly check their withholding on their W-4 every year, and make sure a new one is filed if there is a life change, such as having a baby or getting married. It’s also a good idea for employees to keep an eye out for tax-related paperwork, since tax is due regardless of whether paperwork has made its way to an employer’s mailbox.
Checking in with an HR department can help make sure nothing falls through the cracks. Having paperwork ready and available can make filing taxes as seamless as possible when the time comes. Having your paperwork ready and considering any questions you may have can also maximize your time if you work with a tax prep professional.
The Takeaway
While tax time may be met with eye-rolling and stress, it can also be a time to set up financial intentions and systems for the year. This can include submitting a new W-4 to your employer, estimating quarterly taxes, and developing a strategy to ensure that your money works for you in the year ahead. Keeping on top of your finances throughout the year can make tax time more manageable. An account that allows for saving, spending, and earning all in one place, like SoFi Money®, makes it easier to monitor your finances and make sure funds are in place to pay taxes when they’re due.
Learn more about how SoFi Money® can help you at tax time and beyond.
SoFi Money®
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Source: sofi.com