I've seen it spelled both ways. Are both correct?
Y'all is a contraction of "you all", so I would assume that y'all is the correct spelling.
Wikipedia gives some background on the topic.
what other contraction cuts out letters from the first word? I can't think of any. i agree its a tongue in cheek argument, pretending that the question is important (even when you're from Texas [notice the contraction for you're]). but it boggles my mind to see Northerners assume the contraction is for "you all." Southerns wouldn't have abbrev that phrase in such a way. however, when saying "ya all," them words tenda run tagedder. When you say "you will" the distinction of the "wi" sound tends to disappear, so its dropped when spelling "you'll." Similarly, "ya all" became "ya'll."
As a Northerner, I have seen "ya" as an acceptable colloquialism for "you". However, I've never heard/seen "ya" go with "will", it has always been shortened to "you'll". The "ya" is well established in the Midwest due to the accents inherited by the northern European immigrants. The same goes for the urban population which has retained many southern speech tendencies. That may be due to the more often used conjugations/variants of "to be going to" other than "will" in order to express the future. Although, one might hear something like "ya'll" as a condensed way of saying "yeah, I will"