The tax code is a very long, very confusing maze of documents and dictums. Most working people have received a W-2 form or W2 form even if they didn’t realize it. In short, a W2 statement is made by an employer and sent to IRS which shows wages earned and deductions withheld (such as federal and state income tax, 401k, Medicare, and Social security).
IRS collects W2 forms as part of the process of reconciling income earned with taxes paid.
What is a W2 employee?
When we start working for anyone or any company, we can be hired on as an independent contractor or as an employee. IRS has specific definitions for who is an employee and who is an independent contractor.
In short, if the employer controls how and when a worker does a job (behavioral control), pays for or reimburses business expenses (financial control), then this relationship fits the definition of employer and employee.[1]
The employee in this situation will receive wages from which the employer has to withhold federal and state income taxes, unemployment insurance, Medicare, and social security. The details of these withholdings will always be reflected in the wage statement, also called paystub.
At the close of the year, the employer will prepare a statement called Form W2 or W-2 Form which will be sent to both IRS and to their employee.
Someone is a W2 employee when they work in the employer-employee relationship described above.
What are the benefits of being a W2 employee?
The reason most of us have experience receiving W2 statements is because many jobs are built for W2 employees. For example, my nanny is a W2 worker. During residency, I was a W2 employee. And in my first attending position, I was a W2 employee of a physician group owned and controlled by the hospital system.
W2 Employment Benefit #1: The Employer Provides The Work
In employed situations, it is the employer’s responsibility to create work. For my nanny, I have to provide the environment, the tools, and the work itself (the kids!).
When I was a resident physician, my job was to show up and be a doctor. I did not have to market myself. I did not have to attract patients to the hospital.
As an attending physician, I had to a little more than show up as a doctor. When I first started, my employer asked me to complete assignments that would help to build an outpatient practice. Because my role was limited to being a physician (but not being a marketing director), I did not have to develop the marketing plan myself. Instead, someone who represented by employer told me exactly what to do and I did it. Then, patients began to come to see me, and I could fulfill my job description of being a neurologist.
As an employee, the work often comes to you. You don’t have to drive traffic to the workplace, unless you have agreed to do that as part of your job description. And you don’t have to worry about the details of running the place.
W2 Employment Benefit #2: Work expenses are paid or reimbursed
Another great benefit of being a W2 employee is that the startup costs are very low. You don’t need to purchase many of the tools you need to do business.
For my nanny, that means I provide the workplace (my house), I buy the kids’ toys, I help her with transportation costs. If she purchases something for the children, I pay her back.
And in my work as an employed resident and attending physician, there were numerous reimbursable or paid benefits. The employer bought our malpractice liability insurance, paid an allowance for CME and education expenses, and reimbursed licensing costs.
More than that, the employer located, secured, and furnished physician offices. They took my picture and printed fliers and business cards. They hired an office manager to tend to billing, marketing, and staffing. If I needed a tool to do work as a physician, for example, an EMG/NCS machine for procedures, the employer bought this.
All I had to do was show up and be a doctor.
W2 Employment Benefit #3: W2 Income is favorable for borrowers
Did you know that lenders look favorably upon W2 employees for borrowing? The income is considered steady and reliable.
That’s among the reasons it’s important to pay your nanny above the table. For our family, we have always used a payroll service. Our excellent nanny receives weekly paychecks directly deposited to her bank account. And so every week, she receives a detailed paystub.
When she bought a car last year, she could show proof of regular income with both her paystubs and her W2 statements. For lenders, W2 employment means steady income and potentially better lending terms. This is important to understand when planning for big purchases which may require borrowing, including purchasing a home.
W2 Employment Benefit #4: W2 Employees Receive Benefits
While it’s not universal, many W2 employees receive benefits including health insurance and the ability to contribute to a 401K through their employers.
For some W2 workers, these benefits are part of a compensation package ABOVE their quoted salary.
Annual compensation = Wages + Benefits
For example, when I was a resident physician, we all were obliged to participate in the health plan purchased by the University system. Luckily, the employer didn’t withhold any of my income to pay for this. The benefit was added to my salary which effectively increased my annual compensation.
For our nanny, we also provide her housing, food, car insurance, and health insurance above her wages. We do not deduct these expenses from her wages, which would reduce her take-home income substantially. Instead, she has her wages PLUS health insurance, car insurance, etc.
Beware – some employers DO deduct some benefits from wages. In that case, these benefits are not additive to your overall compensation. For example, if I opted into the employer-sponsored health plan as an attending physician, my employer would deduct the cost from my wages.
Make sure you review your paystubs to see what the employer is deducting. In my case, since we had great health insurance through my husband, I opted out of the employer-sponsored health plan. Instead, I took those wages home as income.
W2 Employment Benefit #5: W2 Employees Tax Accounting Is Simple
Some might not consider it a benefit that for W2 employees, tax time is easy. The employer has already withheld federal income taxes and sent them to IRS and the state.
If you don’t have more than your own or your spouse’s W2 income to account for, you can do your own taxes every year with an online tool such as TurboTax.
On the other hand, W2 employees don’t have the ability to take many deductions enjoyed by business owners. Now that I own my practice, the next time I purchase or lease a vehicle, I will write off some of the expenses.
There are many benefits to being a W2 employee that are left unsaid. There’s peace of mind. There’s the ease of work. For many young doctors with high debt burdens, W2 jobs feel like the only option since the high income coupled with low risk is attractive.
The Bottom Line
W2 employees make up the majority of the American workforce. There are numerous benefits including a fixed job description, reimbursed expenses, and improved opportunities for borrowing.
The downside may be reflected in wealth building. The median net worth of workers is one third lower for W2 workers compared to business owners. In 2019, the median net worth for workers was $122,000, while the median net worth of self-employed individuals was $380,000.[2] The mean net worth is even more skewed, at $747,000 for families of workers and $2.7 million for self-employed.[2]
Don’t let those numbers turn you away from W2 work altogether!
Building a strong financial foundation requires strategy. W2 employment offers many benefits that should not be overlooked, particularly early in a career.
Thanks for reading.
References
[1] https://www.irs.gov/taxtopics/tc762
[2] https://cdn.advocacy.sba.gov/wp-content/uploads/2021/08/17095726/Small-Business-Facts-Business-Owner-Wealth.pdf
