What is a W-2 Employee?
Chances are you have had some work on a W-2 before from a previous employer and know what it’s like being a traditional employee.
As a new business owner, you might think you’re familiar with everything that goes into being a W2 employee. However, there are things you may not know which are important to keep in mind as you begin to hire and staff your business.
A W2 worker is an hourly or salaried employee that pays income taxes and collects employer benefits. Unlike 1099 independent contractors, you’re responsible as the business owner to front all taxes, provide supplies, equipment, and tools, and provide a place of business to work.
However, in exchange, you get someone who becomes familiar with the inner workings of your business and who an (often) help out in more ways than one.
Is W2 a good fit for your business?
If you’ve just started hiring, you might be wondering if taking on traditional W2 employees is a good fit for your business.
After all, 1099 independent contractors are being hired for all kinds of things online nowadays and you can get someone to tackle most tasks remotely for (in many cases) reduced cost.
But there are several unique benefits to W2 employees as well that can’t be overlooked. Here are the pros and cons of W2 employees:
Pro #1: They more reliable
W2 employees work at your place of business all week long. They learn about its inner workings, your brand values, and can help around the office in unexpected ways.
Because of all this and more, they’re typically way more reliable than an independent contractor.
Pro #2: They’re more committed
Similarly, a W2 employee is typically far more committed to your company and cause than any contractor, who likely has little attachment to your company but rather is focused on running their own and dealing with possibly many clients at once.
Pro #3: They can shift gears and help manage workload effectively
Unlike independent contractors, a W2 employee often takes on many different roles during their stay with a company.
This makes that W2 employee incredibly valuable as you then don’t have to spend time going out in search of a new employee with that particular role experience and save money on training.
Con #1: They cost more
W2 employees typically cost more than independent contractors. That’s because, with a W2 employee, you have to pay for all kinds of things you don’t have to worry about with a contractor such as:
- State and federal income taxes
- Social Security and Medicare
- Payroll taxes
- Workers compensation
- Unemployment tax
Con #2: They’re not as specialized
Employees on W2 may be experts in their field, but they’re rarely as specialized and experienced as independent contractors who have their own business with a roster of clients solely providing their specialized expertise.
W2 employee: What forms do you need?
Now that you have some clarity about what makes a W2 employee, potential alternatives, and whether W-2 hires are a good fit for your business, let’s look at what employee w2 forms you need
IRS Form W-2 is aptly where the term “W2 employee” comes from as it’s the only form you’ll typically need to report taxable income from your employees:
As a business owner, you’re required to prepare a W-2 at the end of each tax year for every eligible working employee as well as provide those W-2s to the IRS and SSA (Social Security Administration).
With that out of the way, let’s talk about how to fill out Form W-2.
How to fill out Employee Form W-2
There are many different formats of Form W-2, so yours may not look exactly like the examples we’ve provided. However, each box is the same and you’ll fill in the same information no matter the design of the form.
Here’s how to fill out Form W-2:
Step 1: Enter basic information
First, start by filling in your basic information in sections a-f. This includes your:
- The employee’s SSN
- Your business’s EIN
- Your business address
- Employee’s name and address
Step 2: Enter federal income and tax information
Next, let’s move to the numbered boxes. In the first 15 boxes, you’ll be focusing on filling in all related federal income and tax information.
Here’s a quick rundown:
Box 1: Wages, tips, and other compensation
Pretty straightforward here, this box is for the employee’s total taxable standard income including wages, salaries, tips, bonuses, etc.
Box 2: Federal income tax withheld
Here you’ll list the total amount you withheld from your employee in federal income taxes online.
Box 3+4: Social security wages and tax withheld
Here you’ll list the total amount of the employee’s wages are subject to SSA tax in box 3 and the total amount in SSA taxes withheld from said employee’s paychecks in box 4.
Box 5+6: Medicare wages and tax withheld
Similar to boxes 3 and 4, here you’ll list the total amount of the employee’s wages are subject to Medicare tax in box 5 and the total amount in Medicare taxes withheld from said employee’s paychecks in box 6.
Box 7+8: Social Security and allocated tips
In box 7, you’ll list any tip income. Leave empty if the employee has no tip income to report. Then, in box 8 you’ll list tip income which you specifically allocated to your employee.
Box 9: N/A (Skip)
(This was a tax perk that is no longer relevant, so you can skip this box.)
Box 10: Dependent care benefits
Here you’ll list any reimbursement amount for dependent care expenses through a flexible spending account OR the dependent care in dollars provided by you to the employee.
Box 11: Nonqualified plans
Here you’ll list any income which you distributed to the employee from any Section 457 pension or non-qualified deferred compensation plan.
Box 12a-d
Boxes 12 a-d are for any deferred or other compensation that employee might have earned.
The IRS has set up handy codes that can be inputted into these boxes to notate specific types of deferred compensation. To learn more about IRS deferred compensation and these codes, see here.
Box 13
Similar to box 12, this includes additional income and other items related mostly to being a statutory employee.
Box 14: Other
This is an extra section for reporting items that don’t fit in the earlier income boxes. This may include things like after-tax contributions for a retirement plan or employer tuition assistance.
Step 3: Enter state income and tax information
Lastly, you’ll need to do the same thing you did in the previous section for the employee’s state and local income and income taxes.
This includes boxes:
- 15: Employer’s state ID number
- 16: State wages, tips, etc.
- 17: State income tax
- 18: Local wages, tips, etc.
- 19: Local income tax
- 20: Locality name
Locality name refers to the name of any additional state or city tax being paid on the employee’s W-2.
Conclusion
It might seem like a no-brainer that you’ll hire W-2 employees as a business owner. However, it’s important to not make any assumptions and consider the facts.
In some cases, an independent contractor may be better suited. In others, a W2 employee is clearly better.
No matter what you choose, what matters is that you educate yourself about those next steps so you know what you’re getting into. That way, you can prepare for the future and make that next forward the right step.
