What is the Difference Between a W-2, W-3 and W-4 Form?
From a W-4 Form to a Form W-3 and even a W-2, there are many different IRS forms that relate to payroll processing and payroll tax filing for small and mid-size business owners. Employers and most employees easily recognize and know the basics of what a W-2 and W-4 form are used for. But there are probably a good number of employees that have no idea what a Form W-5 is… and whether it applies to them. We’ll go through some of the most common payroll IRS tax forms and provide a definition and an explanation as to how they are used by employees and employers.
A W-2 Form, also known as a Wage and Tax Statement, is a tax form that employers are required to prepare and send to each employee and the IRS at the end of the year. A W-2 reports, among other things, the total amount of an employee’s gross earnings as well as the amount of Federal and State taxes withheld in a calendar year. W-2 forms also provide details on deductions an employee makes to a retirement plan and contributions to a qualified pre-tax health spending account. These are deductions that must be reported to the Internal Revenue Service. Employers are required to provide a copy of Form W-2 to every employee on or before January 31.
A Form W-3, also known as a Transmittal of Income and Tax Statement, is an IRS payroll tax form which an employer must file with the Social Security Administration (SSA) along with Copy A of each W-2. A W-3 form is a summary of all the various individual W-2 forms your company is submitting to the Federal government. It tells the Internal Revenue Service how many employees your company has and whether your W-2 forms are accurate. Form W-3 also provides a formal reconciliation of the quarterly tax payments made throughout the year on Form 941 for your business. This payroll tax form must be signed by the employer and filed with the IRS by the last day in February… or by the last day in March if you are filing electronically.
A W-4 Form, also known as an Employee’s Withholding Allowance Certificate, is an Internal Revenue Service tax form which all new employees must fill out. This Federal tax form is used by an employer so they can calculate the amount of tax to withhold from an employee’s paycheck during payroll processing. The Form W-4 indicates an employee’s social security number as well as the number of personal exemptions that an employee is claiming. An employee can fill out a new W-4 form anytime their tax situation changes… like a change in marital status or number of dependents. At that time, an employee can choose to have more or less tax withheld from their paycheck.
A Form W-5, also known as an Earned Income Credit Advance Payment Certificate, must be filled out by eligible employees that want to receive part of the earned income credit (EIC) in advance, along with their pay. The Earned Income Credit (EIC) is sometimes referred to as the Earned Income Tax Credit (EITC). The EIC or EITC is a credit for certain employees and was designed to supplement wages for low income workers. Many workers may now be considered low income because within the last year they lost their job, took a significant pay cut or worked fewer hours. The earned income credit reduces the tax an employee owes. It may also give an employee a refund even if they do not owe any taxes. For the tax year 2009, the maximum earned income credit an employer is allowed to provide an employee is $1,826, in addition to their regular pay. To receive the rest of any EIC an employee is entitled to, they must first file their annual personal tax return and claim the earned income credit.