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Few things in life are guaranteed, but annual tax filings are an exception. But despite its inevitability, tax season is full of potential curveballs.
Unfortunately, the Internal Revenue Service in the U.S. doesn’t leave room for mistakes. All businesses must file the correct tax forms to remain in compliance and avoid costly penalties and lawsuits. If you manage a distributed workforce of regular and non-regular employees, you need to differentiate a W-9 versus a W-4 when classifying employees, calculating tax withholdings, and filing taxes.
So, what is a W-4, and what’s the purpose of a W-9? And where do they fit in with other tax forms, like a 1099, W-5, or W-2? If all these forms make you feel dizzy, we’ve got you covered. Read on for Oyster’s tax form breakdown.
What is IRS Form W-4?
Form W-4, also known as the Employee’s Withholding Certificate, is a tax form that helps employers calculate the amount of federal taxes to withhold from their regular employees’ paychecks. Each employee’s financial situation is unique, and the W-4 helps payroll calculate and withhold taxes for every employee.
This IRS form considers several factors to determine an employee’s withholdings for federal income taxes, including the following:
- Marital status: Whether someone is single, married, or head of household affects the taxes withheld from their paycheck. Different marital statuses come with different tax rates and standard deductions.
- Filing status: Married people can file taxes jointly or separately with their spouse. Their decision may depend on their desired tax bracket, standard deductions preferences, and available tax credits.
- Deductions and adjustments: These may include dependents, itemized deductions for medical expenses or charitable donations, and other sources of income.
- Extra withholding allowances: Taxpayers can request that extra money be withheld from each paycheck. Extra withholding allowances can be useful if they expect additional tax liability (like a big bonus or investment payout) or want a larger refund at the end of tax season.
Filling out a W-4 is mandatory for all new hires. Although employees don’t need to file a new tax form to payroll each year, they will need to make adjustments to account for changes in personal circumstances, such as a salary raise, a new child, or substantial changes in deductions.
What is Form W-9?
Form W-9, or a Request for Taxpayer Identification Number and Certification, is used by freelancers, independent contractors, and other nonemployees. Its primary purpose is to provide employers with a Taxpayer Identification Number (TIN) so they can properly report a contract worker’s income to the IRS.
The main pieces of tax information collected in a W-9 form include:
- Taxpayer Identification Number: A nonemployee’s TIN is either a Social Security Number (SSN) for individuals or an Employer Identification Number (EIN) for businesses. The IRS depends on a TIN for accurate accounting, ensuring that payments received are correctly linked to the taxpayer’s income records.
- Entity type: Taxpayers must specify whether they are an individual or sole proprietor, corporation, or partnership. This information is necessary to determine the correct tax categories and which 1099s employers should use to report payments.
- Certification: Signing a W-9 certifies the accuracy of the TIN and other information. It also affirms that the taxpayer isn’t subject to backup withholdings (e.g., payment for underreported interest or dividends), is a U.S. citizen or resident, and complies with tax laws and regulations.
All independent contractors and nonemployees must provide Form W-9 to clients if they receive payments totaling $600 or more during a single tax year. Although the W-9 isn’t submitted to the IRS, employers need one on file to accurately report and maintain tax records if payments total $600 or more during a single tax year.
Key differences between W-4 and W-9 forms
Want to ensure you’re not filling out a W-4 when you should be turning in a W-9? Let’s quickly review the differences:
Who completes the form
Regular employees who receive wages or salary from an employer fill out Form W-4. Freelancers, independent contractors, and other nonemployees who render services for a business provide their clients with Form W-9.
Purpose of the form
A W-4 provides up-to-date information so employers can correctly calculate federal income tax withholdings from each paycheck. A W-9 is purely informational, providing employers with information to properly report payments to the IRS.
Information required
A W-4 provides detailed information about an employee’s personal circumstances, filing status, eligible deductions, and adjustments. A W-9 provides employers with basic information to classify and report payments to the IRS.
Consequences of incorrect completion
If an employee fills out their W-4 incorrectly, their employer may withhold too much or too little from their paycheck, leading to an unexpectedly large refund or a tax bill with their income tax return. The IRS may seek penalties when incorrect withholding results in underpayment of federal income taxes. When a W-9 is inaccurate or incomplete, the nonemployee will likely be subject to IRS penalties or serious delays in tax processing.
Enhance tax compliance and streamline form management with Oyster
Tax day is a predictable part of the fiscal year. Filing your taxes should be, too. Compliance can be challenging when you manage a distributed team of regular employees and contractors. But Oyster’s global compliance takes the guesswork out of tax forms. Try out Oyster and get assistance from tax experts to remain compliant in more than 180 countries.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.
FAQs
You have questions about tax forms. We have the answers.
1. Is a W-4 required for independent contractors?
No, a W-4 form isn’t required for independent contractors. The W-4 is meant for regular employees who receive a salary or hourly wage to determine how much federal income tax should be withheld from their paychecks. Independent contractors provide W-9 forms to all businesses that will report their income.
2. How long is a W-9 valid for?
There is no expiration date for a W-9. However, information should be updated when there are changes to the taxpayer’s details. For example, if a regular contractor switches from sole proprietor to opening their own LLC, they must update their W-9.
3. How often should you update information on a W-4?
Employees should periodically review and update their W-4s whenever their personal or financial situation significantly changes. These include changes in gross pay, marriage status, or eligibility for tax credits. Business owners should take the lead and set annual reminders for employees to confirm the accuracy of their W-4.
4. Where do I report pre-tax and post-tax deductions?
Pre-tax and post-tax deductions are generally handled directly in payroll processing. To report pre-tax deductions, payroll adjusts employees’ taxable income based on their contributions to eligible deductions like health insurance premiums or a traditional 401(k). Post-tax deductions—like a Roth 401(k) contribution—are taken from employees’ paychecks after federal income tax is withheld. Both are reported on an employee’s W-2 form.
5. Are W-4 or W-9 forms related to payroll taxes?
Neither the W-4 nor the W-9 directly impacts standard payroll taxes, including Medicare taxes, Social Security taxes, and unemployment taxes. Employers use Form W-4 to determine the amount of federal income tax to withhold from paychecks—it doesn’t affect Medicare taxes or Social Security taxes, which have fixed tax rates.
