Future Business Leaders of America (FBLA) Accounting Practice Test

What is the purpose of Form W-2?

1. To summarize an employer's tax obligations

2. To summarize an employee's earnings and tax deductions for the year

3. To record cash deposits in a checking account

4. To report unemployment taxes yearly

The correct answer is: To summarize an employee's earnings and tax deductions for the year

Form W-2 is designed to provide a comprehensive summary of an employee's earnings and tax withholdings for the year. This form is essential for both employees and the IRS, as it details the amount of wages earned, the federal, state, and other taxes that have been withheld from those wages, as well as contributions to retirement plans and other benefits. When employees receive their W-2 forms in January, they use this information to accurately prepare their individual tax returns. The data provided helps ensure that they report their income correctly and determine any additional tax due or refund owed. This makes the form vital for tax compliance and planning for both workers and tax authorities. The other options reflect different functions that do not apply to Form W-2. For example, summarizing an employer's tax obligations is handled differently, typically through forms such as Form 941 or Form 940. Recording cash deposits in a checking account doesn’t pertain to income reporting at all, while reporting unemployment taxes is done through separate forms dedicated to that purpose, separate from the wage reporting done on Form W-2.