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Photo: Frankieleon, Flickr.

W-2 forms are a critical part of many people's tax-preparation process, as they report wages paid and taxes withheld by an employer over the course of a year. One advantage they have over many tax-related forms is that you don't have to fill out a W-2 form. You simply receive it and use it. 

The first thing to know is that you're not the only person your employer prepares a W-2 for. You, the IRS, and the Social Security Administration will generally get a copy, making it unwise to think about under-reporting your wages or over-reporting taxes withheld. Know, too, that you can expect a W-2 form if you're an employee and you earned $600 or more or had any amount withheld. If you earn money as an independent contractor, you can expect a 1099 form instead of a W-2 from your employer as long as you made more than $600.

What's on the W-2 form
The W-2 form is small, but it contains a lot of important information, such as:

  • Your name and mailing address.
  • Your Social Security number.
  • Your employer's Employer Identification Number.
  • Your total taxable wages or payments earned over the year.
  • The amount of federal tax that was withheld during the year.
  • The amount of state and/or local tax that was withheld.
  • The Medicare and Social Security taxes that were withheld.

When you receive your W-2 form -- which your employer is required to send you by Jan. 31 -- you will usually receive multiple copies of it. That's so you can keep one for your records and also include a copy with your federal tax return and your state, city, or local tax return. If you don't get your W-2 on time, the IRS has guidelines for what you need to do

Always review your W-2 form to make sure the information is correct. If your name is misspelled or your Social Security number is wrong or missing, the IRS will have trouble matching up its records of what you earned and paid with what you're reporting. This can delay the processing of your return and can even trigger an audit.

There are a few other boxes on the W-2 form with information that you or your tax preparer might need to refer to when filling out your tax return. Box 10, for example, will include the value of benefits you received through a dependent care assistance program. Sums under $5,000 are not taxable. Box 11 features the sum distributed to you from your employer's non-qualified deferred compensation plan, which is taxable. The sum that you contributed to a retirement savings account appears in Box 12, as do all kinds of other reportable sums, such as non-taxable combat pay, substantiated employee business expense reimbursements, excludable moving-expense reimbursements paid directly to you, benefits tied to the adoption of a child, income from exercise of non-statutory stock options, and a variety of other .

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Your W2 form helps you determine what tax refund you'll receive, if any. Photo: Frankieleon, Flickr.

Why the W-2 is critical
You may be aware that self-employed folks generally have to make estimated tax payments throughout the year, and you might assume that unlike them, you don't have to pay your taxes until April 15. That's not the case, though. Uncle Sam doesn't want to wait all year, so employees also make regular tax payments throughout the year. That's what's going on when your employer withholds taxes from your paycheck. They're withheld and sent to the IRS.

Later, when you prepare your taxes, your W-2 summarizes how much has been withheld for income taxes, Social Security, and Medicare. When you calculate your total tax due for the tax year, you then subtract how much you have already paid the IRS and typically end up owing just a little more in taxes or being due a refund for over-payment.

That alone is a big reason to care about and understand your W-2 form -- it often determines whether or not you'll receive a tax refund check that year and how big it will be.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.