W-2s, W-4s, W-9s, Oh My

How to Fill Out Every Tax Form from W-2s to W-4s to W-9s
by Kit Warchol
Photos Stephanie Yang | November 04, 2016
So you're starting a new job, and suddenly you're faced with a pile of paperwork including mysterious tax forms. Do you put in zeros? Ones? What is this, a Choose Your Own Adventure novel?
Not exactly, but if you're anything like us, you've probably filled out a W2 or a W9 with zero idea whether you're doing it right. Single? Married? What about tax write-offs? It's a mess, yeah? Well today we're starting small: here's a breakdown of the four main forms to know: 

the standard: w-4 (you fill this out)

You've probably encountered this more often than any other form. Your W4 determines how much taxes will be withheld by your employer from every paycheck. In the simplest terms: the lower the total number, the more taxes will be withheld. 

Best Tips for Filling Out a W4

Here's an interesting fact: while it's incredibly fun to get a big fat refund check in the mail (or deposited into your account), that's not the ideal financial scenario. Think of it this way: that's money the IRS has been sitting on and using all year. But if that extra money had been coming into your take-home pay, you could have been using it all year. And if you put it into a high-interest savings account? You're earning off the same money, rather than waiting for it to make its way back to you in April or May of next year. So the goal: fill out your W-4 allowances so that you get as close to $0 as possible in a refund. 

But wait. What are allowances?

A quick definition: allowances are personal or financial conditions that affect your ability to pay your federal taxes. Think: things like getting married, having children, taking care of an aging parent. The W-4 form worksheet will prompt you on tallying them up (0 for when you don't have qualify for a specific allowance, 1 for when you do), then you'll drop them into #5 on your W-4 form.

If that still sounds confusing, according to Forbes, here's the main thing you really need to keep in mind: the more allowances, the fewer dollars are taken out of each paycheck (i.e. more take-home pay). Fewer allowances mean that you'll pay more taxes per paycheck (and have less take-home pay). 

How do I determine my ideal allowances?

So how do you fill out your form so that you get the best number of allowances possible? Easy: use the IRS withholding calculator. If you're more of a manual do-it-yourself type, this article gives a detailed breakdown of how to fill out your form on your own, no automatic calculator required. 

When You Should Change Your W-4

Like we mentioned above, as nice as getting a $3,600 tax return might feel, that's $3,600 you didn't have to spend in your paychecks over the course of the year. According to a recent TurboTax assessment: "The average Federal tax refund for 2013 was more than $3,021. That means, on average, taxpayers who get refunds let the IRS take about $240 more out of their paychecks each month than the government deserves." 

Um, 240 bucks? So ask yourself: how comfortable were you living off your paycheck last year? Would that extra money in each paycheck have made a difference? If your return last year was sizable, now's the time to consider updating your W-4. Below are two tables created by TurboTax based on their best recommendations.

How to figure out the number of extra withholding allowances you should claim:

Step 1: Find your income bracket in columns 1 or 2.
Step 2: Divide the refund you got last year by the number in column 3. The number you get is the number of allowances you should claim to get your refund closest to 0.
Data courtesy TurboTax.

How to figure out how much your monthly pay will increase:

Step 1: Find your income bracket in columns 1 or 2.

Step 2: Multiply this amount by the number of extra allowances you will claim to see about how much your monthly take-home pay will increase.
Data courtesy TurboTax.

W-2 (you get this in the mail at tax season)

This is the form you receive in the mail from your employer and ultimately use to file your taxes. If you're lucky and your company's particularly savvy, the form may be digitized. The best case scenario is that it's set up so it automatically imports into things like TurboTax. 

for independent contractors, sole proprietors, freelancers, etc: W-9  (you fill this out)

This is the form that you fill out if you're a "sole proprietor" working for a company. Yeah, we weren't sure what that meant for our taxes either. Probably the biggest point is: your employer isn't responsible for withholding taxes from your check. In other words, you'll need to set aside and pay taxes on your own time. For some, that means paying quarterly taxes. For others that means setting aside a fund in your savings account for your anticipated IRS payment. 

Best Tips for Filling Out a W-9

So it's a bit confusing, but here's what Bola Sokunbi of Clever Girl Finance has to say about how to approach the form: "One thing to keep in mind is that you only need to fill out a W9 if you are a contractor or freelancer, and you are not considered an employee by the company you are doing work for.

The "Type of entity" field is usually confusing for many, especially if they have not filed any paperwork to form a business. If you fall into this category, and you have not filed any formal paperwork for your business formation then you are a considered a sole proprietor. As a sole proprietor, you can use your name as it appears on your tax returns for your business name and use your home address in the address field."
So as a sole proprietor, you're essentially your own "company" and can file under your own name. 

How Much Money Should You Set Aside for Taxes?

You'll need to figure out your tax bracket because it varies. If you're working full-time with multiple companies and filing W-9s, it's probably wise to work directly with an accountant. That being said, here's a break-down of how to determine how much to set aside in savings. For a general (and conservative) idea of what to expect, think in terms of about 25% - 30% of your total income. If you're planning on setting aside this money in your own savings account for the year, we highly recommend setting up a high-interest savings account. What that means: typically savings accounts at banks offer, say, a .1% interest rate. But there are accounts that offer much higher interests, especially through online banks that don't have to offset costs for brick and mortar locations. For example, Ally savings accounts offer 1% interest with zero maintenance fees. 

1099 (you get this in the mail at tax season)

These are the forms you'll receive in the mail around tax season, and you'll need to file them all. We won't go into the mess that is claiming expenses, etc, but Mashable did a pretty good job right here. Again, if you haven't filed as a sole proprietor before, we highly recommend you speak to a tax professional. Often, other freelancers will be able to recommend a good accountant who specializes in this sort of income. 
 Have other questions about freelancing or setting aside taxes? Ask us below and we'll answer them for you.