How to Pay Taxes as a W-2 Employee

Wondering how to file your taxes this season? Don’t worry. You’re not alone. If you're working in the U.S, understanding taxes can be a bit confusing, especially if you're new to the system. This guide is designed to help you understand how to pay  your taxes if you're working as an employee in the U.S.

What Does Being a W-2 Employee Mean?

If you receive a regular salary or wages from an employer, you're likely a W-2 employee. This means your employer will give you a form called a W-2 during tax season.

What is a W-2 Form?

The W-2 form is a record that shows how much money you earned and how much tax was taken out of your paychecks during the year. 

Your employer will provide the completed form for you, it’s not something you have to fill out yourself.

Why does this matter?

As a full-time employee, every paycheck you received is already taxed. Your employer takes out some money from each check and pays it to the government.

The W-2  is basically a receipt that shows the IRS (the tax branch of the government) what taxes they have already paid on your behalf. When your employer takes taxes from your paycheck, it’s only an estimate based on your income. The actual taxes can depend on other factors (ex. Marital status), which is why the IRS needs to confirm what you have already paid.

If your employer took out too much money for taxes, filing your taxes will allow you to receive a tax refund and you’ll get that money back.

If your employer didn’t take out enough, you may owe some taxes to the government. Don’t worry though, it’s rarely ever a large amount. If you do owe taxes, the government will ask you to pay the remaining amount, either through a payment plan or upfront.

How do you file taxes?

Filing taxes as a W-2 employee is simple  if you’re just reporting income. 

To file taxes, you’ll need to fill out a form called the IRS Form 1040. It’s basically a worksheet that walks you through what you’ve paid in taxes, what your income was, and if you over or underpaid.

It may look intimidating at first, but there’s no need to worry. Most of what’s on there doesn’t apply to the standard, single-income employee. Remember, all W-2 employees need to use this form. That means there’s options for everyone, such as people who have side-hustle income, tip income, deductions or any other tax complications.

Once you’ve completed the form, you simply attach your W-2 to it and send it off to the IRS. You can find the address to send it to here or digitally send it off here. After that, you’ve officially filed your taxes!

Filling out Form 1040: Deductions, Credits, and Other Factors

When filling out these forms, you may see a lot of strange or unfamiliar terms. Let’s do a rapid fire of the terms you’ll be seeing on these forms and what they mean.

Quick List Of Tax Terms

• Tax Deduction

  • A deduction lowers the amount of your income that gets taxed. For example, if you earned 20,000 dollars and claimed a 5,000 dollar deduction, you only have to pay taxes on 15,000 pre-tax dollars. The remaining 5,000 no longer applies to the tax math.

• Tax Credit

  • A tax credit lowers the amount of taxes you owe. For example, if you owe $2,000 dollars in taxes and take a $500 tax credit, you now only owe $1,500

• Credit vs Deduction

  • The difference between a credit and a deduction can be confusing at times. Put simply deductions reduce the amount of your income that the government uses to calculate your taxes, whereas credits reduce the actual taxes you have to pay.

• Standardized vs Itemized Deduction

  • A standard deduction is a set deduction amount that you take upfront based on your filing status (married, head of household, single etc)

  • An itemized deduction is a list of deductions based on what you spent your money on throughout the year. Here’s some examples of typical deductions

    • Medical expenses

    • Donations to charity

    • Mortgage interest

    You must choose either a standard deduction or an itemized deduction, you cannot have both. Pick whichever one is higher to save more money. 

A Step By Step Checklist

We’ve covered a lot of information in a rather dense document. Before we close out, we’ve provided a quick summary of everything we’ve covered for you.

Receive your W-2 form

• Get the W-2 form from your employer. It shows your yearly earnings and the taxes they’ve already paid on your behalf.

Prepare your forms

• Fill out the IRS Form 1040

• Make sure to check for any eligible deductions or tax credits ou may qualify for

• Attach your W-2 to IRS Form 1040
  
  Send the completed form to the IRS

• Send out both IRS Form 1040 and your attached W-2 either digitally or physically to the IRS. 

That’s everything! Hopefully, with this guide, you're now better equipped to navigate the U.S. tax system!