What Is a W-2 Form? How Wage and Tax Statements Work

Key takeaways:

• A W-2 form is a federal tax form that documents an employee’s total compensation, fringe benefits, and tax deductions for the prior year.
• It is your responsibility to prepare W-2 forms and provide copies to your employees and the Social Security Administration by January 31st.
• W-2 forms are only for full-time employees — not freelancers, independent contractors, or similar workers.

If you have full-time employees, you need to send out W-2 forms every January, cataloging your employees’ wages and payroll taxes for the previous calendar year. A W-2 is essential for your employees to file their tax returns and is one of the most common federal forms in the United States.

If you need the W-2 form template, visit the IRS’ About Form W-2, Wage and Tax Statement page. 

What is a W-2 form used for?

A W-2 contains information that employees use to file their federal tax returns. It shows how much you paid the employee during a calendar year plus how much federal, state, and local taxes you deducted and remitted on their behalf.

The W-2 forms will also include relevant fringe benefits such as health insurance, health savings account contributions, retirement account contributions, adoption assistance, and dependent care assistance.

Figure A

What is the difference between a W-2 and a W-4?

Employees fill out W-4 forms as part of their onboarding process. It tells you how much tax to withhold from their future paychecks, and that information is used to calculate the correct paycheck and deductions each time you run payroll.

In contrast, you are responsible for filling out W-2 forms at the end of the year to show how much tax was withheld from past paychecks based on the information given on the W-4.

What is the difference between a 1099 and a W-2?

1099 forms are a group of tax documents for reporting various kinds of non-employee income. The most common is Form 1099-NEC, which documents independent contractor, freelancer, and gig worker compensation. Unlike those who receive W-2s, workers who receive 1099-NECs are responsible for calculating and paying their own federal, state, and local taxes.

Although you don’t withhold taxes on your payments to 1099 workers, like with W-2 forms, you are responsible for sending them appropriate 1099 forms with last year’s compensation data by January 31st.

Does everyone get a W-2 form?

Full-time employees who are paid more than $600 in a calendar year should receive a W-2 form. If a worker is classified as a freelancer, independent contractor, or non-employee, then you’ll send them a 1099 form instead.

What are the benefits of a W-2 employee?

From a business’s point of view, W-2 employees have quite a few advantages. They are essentially dedicated to your company during their working hours, so they can commit more time and effort to their tasks for better quality, consistency, and familiarity.

While it’s good practice to listen to your employees and new hires and create agreements that benefit both parties, you have some say over where and when employees work. That way, you can ensure they’re available at optimal times and touch base with them much more easily.

However, W-2 employees receive multiple legal protections in exchange for these perks. Some common ones include overtime, minimum wage, family and medical leave, worker’s compensation, and unemployment insurance. They also have the right to participate in your health, dental, and retirement plans. So you have to decide if these advantages are worth the cost of providing these benefits.

When should employees receive their W-2 forms?

The IRS requires you to send out W-2 forms by January 31st of each year, which means employees should receive their W-2 somewhere around the end of January or the start of February (depending on whether it’s a digital or hard copy). If you’re a small business doing payroll yourself, it’s best to start preparing W-2s at the beginning of the new year so that employees receive them as soon as possible.

Luckily, if you use a payroll provider, most will automatically complete and send W-2s electronically to employees. Gusto, for example, provides an online portal for employees to access their W-2 forms and other payroll documents at their convenience (Figure B). Leveraging payroll platforms for W-2 preparation and distribution saves time and eliminates the yearly cost of sending employees their W-2s by mail.

SEE: Best Payroll Software for Your Small Business and The Best Cheap Payroll Services

Figure B

What types of information does a W-2 form contain?

If you complete your employee W-2s by hand, below is a list of the information you need and which box it goes in.

• Box A: Employee’s Social Security Number.
• Box B: Employer identification number (EIN).
• Box C: Employer’s name, address and zip code.
• Box D: Control number.
• Box E: Employee’s first name, middle initial and last name.
• Box F: Employee’s address and zip code.
• Box 1: Wages, tips and other compensation that is taxable.
• Box 2: Federal income tax withheld.
• Box 3: Wages that are subject to the Social Security tax.
• Box 4: Social Security tax withheld.
• Box 5: Wages that are subject to the Medicare tax.
• Box 6: Medicare tax withheld.
• Box 7: Social Security tips (how much you reported in tips).
• Box 8: Allocated tips (how much your employer reported paying you in tips).
• Box 9: Used to report advanced income credit payments, which is now defunct, so this box should remain empty.
• Box 10: Dependent care benefits received from employer.
• Box 11: Deferred compensation income from a non-qualified plan.
• Box 12: Other types of compensation or reductions to your taxable income.
• Box 13: Pay that is not subject to income tax withholding.
• Box 14: Other tax information that doesn’t fit into any other boxes.
• Box 15: State and employer’s state ID number.
• Box 16: State wages, tips, etc.
• Box 17: State income tax.
• Box 18: Local wages, tips, etc.
• Box 19: Local income tax.
• Box 20: Locality name.

How does a W-2 work?

First, you as the employer will generate the W-2 form, which may be done manually or by using a payroll software platform or service. After you’ve put together the W-2 form, you send it to both the employee and the Social Security Administration (SSA).

From there, it’s all up to the employee. They use the information on their W-2 to file their tax return. To ensure accuracy, the IRS then checks employees’ tax returns against the tax payments you’ve sent to the IRS on their employees’ behalf.

If you need to submit W-2s electronically to the SSA, check out SSA’s W-2 information page for instructions, then visit the Business Services Online portal.

Ready to find payroll software that can automate the W-2 filing process for your business? Check out our guide explaining how to choose payroll software or read our top picks for the best payroll software.

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