What is the purpose of Form W-2?

Form W-2 serves a critical role in the tax reporting process as it is used by employers to report wages paid to employees and the taxes that have been withheld from those wages throughout the year. This form is a key document in the preparation of an employee's income tax return, as it provides the employee with necessary information regarding their total earnings and the amounts deducted for federal, state, and other taxes.

When employees receive their Form W-2, it includes details such as their total compensation, Social Security wages, and Medicare taxable wages, as well as information regarding any other deductions like health insurance or retirement contributions. This comprehensive summary enables employees to accurately file their taxes, reflecting the correct amounts owed or refundable.

Understanding the purpose of Form W-2 is essential for both tax professionals and employees, as it ensures compliance with tax laws and accurate reporting of income and taxes withheld, which impacts overall tax liability. Other options focus on different aspects of financial reporting, such as capital gains or business expenses, which do not pertain to employee wage reporting, thus clarifying why they’re not relevant in this context.