Producing Employee W-2s
,As an employee, you probably always wondered why most companies waited until the last possible minute to give out the W-2s, especially if you’re expecting a refund and want to file your tax return as early as possible. After you learn how time-consuming it is to compile these forms, you’ll have a better idea of why companies take so long to get the forms out.
Payroll computer software certainly makes the task easier, but depending on the size of your payroll, it’s still time-consuming to check the numbers before sending out the forms. Although you can send a corrected form if you make a mistake, that, too, is a time-consuming process you hope you can avoid by doing it right the first time. Your company may even have to pay penalties for incorrectly filed W-2s. More on that later.
This is a sample of a 2010 W-2 form.
First, let’s look at what is supposed to be included in all those little boxes. You’ll now see why it is so important to keep your employee’s paycheck details in a payroll journal or file for each employee individually. Payroll software automatically tracks this information for you.
• Box 1: All wages, tips, and other compensation. This should include any bonuses, prizes, awards, noncash payments (including some fringe benefits as discussed in Chapter 14), or other compensation that does not qualify for an income exclusion or exemption.
• Box 2: Federal Income Tax Withheld.
• Box 3: Social Security Wages. Remember from our discussion in Chapter 14 that some fringe benefits are excluded from Social Security taxes while others are not. If an employee earns more than the maximum to be taxed, then the Social Security maximum would be in this box.
• Box 4: Social Security Tax Withheld.
• Box 5: Medicare Wages and Tips. The same fringe benefits are reported here as with Social Security, but there is no cap on wages, so all the employee’s taxable wages would be included.
• Box 6: Medicare Tax Withheld.
• Box 7: Social Security Tips. The tips your employee reported to you should be shown here. The total of this box plus Box 3 should not exceed the Social Security Wage cap.
• Box 8: Allocated tips. Some large food or beverage businesses allocate tips rather than have employees collect and report them separately. These allocated tips are reported in this box.
• Box 9: Advance EIC. If you paid a qualified employee advances on his or her Earned Income Credit, you would report those advances in this box.
• Box 10: Dependent Care Benefits are reported in this box.
• Box 11: Nonqualified Plans. This box is used to report distributions of retirement plan assets that are nonqualified (does not meet federal retirement plan rules). Qualified retirement plan assets distributed are reported on a 1099-R. (This includes 401(k)s, IRAs, pensions, and other qualified plans.)
• Box 12: Codes. Items coded A to Z fit in this category. You report the designated code and its matching dollar amount. For example, Code A is for uncollected Social Security tax on tips, Code J is for nontaxable sick pay, and Code T is for adoption benefits. You can get a full listing of the codes in the IRS instructions for the W-2, which come with your W-2 forms, or you can download it at www.irs.gov/pub/irs-pdf/iw2w3.pdf.
• Box 13: Three boxes you can check if they apply. The first box is checked if the employee is a statutory employee. The second box is checked if your company offers a qualified retirement plan. The third box is checked if your company serves as a third-party sick pay payer. This is most commonly used if an employee receives compensation from an insurer, such as workers’ compensation.
• Box 14: Other. This is where miscellaneous items are reported, such as fringe benefits that were included in Box 1 that you need to explain to the employee. Essentially this box is for information to be shared with the employee that gives details about certain figures on the W-2.
• Boxes 15 to 20: State and local tax information.
DEFINITION
Statutory employees are employees whose earnings are subject to Social Security and Medicare, but are not subject to federal income tax withholding. For example, this includes agents or traveling salespeople who are allowed to report income and expenses as a business.
You must give your employees their W-2s by January 31. These must be mailed on or before January 31. If that date falls on a weekend, you have until the following Monday to supply the forms. You can supply a W-2 earlier if the employee leaves the company. If you can’t meet the W-2 deadline, you have to formally request an extension by sending a letter to:
IRS-Martinsburg Computing Center
Information Reporting Program
Attn. Extension of Time Coordinator
240 Murall Drive
Kearneysville, WV 25430
Information Reporting Program
Attn. Extension of Time Coordinator
240 Murall Drive
Kearneysville, WV 25430
The letter should include the following information:
• Your business name and address
• Your EIN
• Type of return (W-2)
• Statement requesting an extension to furnish W-2s to employees
• Reason for delay
• Your signature or signature of your authorized agent
Penalties for failing to provide the W-2 on time and correctly can be high. There are three levels if you have requested an extension:
• $15 per Form W-2 if you correctly file within 30 days of the due date. The maximum penalty is $75,000 for the year. Companies with average annual gross revenues under $5 million face a $25,000 maximum penalty.
• $30 per Form W-2 if you correctly file more than 30 days after the due date but by August 1. Maximum penalty is $150,000 for large companies and $50,000 for small businesses.
• $50 per Form W-2 if you file after August 1 or do not file required W-2 forms. Maximum penalty is $250,000 per year and $100,000 for small businesses.
Your W-2s can be incorrectly filed if you don’t include all the necessary information, if the information is incorrect, if you report an incorrect taxpayer identification number (Social Security number), or if you provide unreadable forms. Now you know why you want to check those W-2s carefully even if you use a payroll software program or use an outside company to prepare your payroll.
AUDIT ALARMS
If you do not file corrections and you do not meet any of the allowable exceptions, your penalty is $50 per return. Allowable penalty exceptions include reasonable cause (failure to file was because of an event beyond your control and not neglect) and you did your best to avoid the failure to file. If the incorrect information was inconsequential or an omission that did not hinder the Social Security Administration or the IRS from processing the W-2, you also qualify for an allowable exception.
If you don’t get an extension, fail to provide the W-2s to your employees by January 31, and cannot show reasonable cause, you could be subject to a $50 penalty per W-2. This penalty also applies if you fail to include all necessary information or include incorrect information on the W-2.
The stiffest penalty is imposed if the IRS determines your failure to provide the forms on time was an “intentional disregard of payee statement requirements.” If that happens, the fine is $100 per W-2 with no maximum penalty.
You could be hit with a suit for civil damages if you fraudulently file a W-2 claiming you paid someone wages you didn’t actually pay. The person may be able to sue you for any damages this caused them.
There are usually four copies of the W-2 given to the employee (one for the employee’s file, one to file with the federal income taxes, one for state income taxes, and one for local income taxes). Additionally, one copy is sent to the federal government and one copy is kept by the employer. That’s six copies (or a six-part form). Some states require an eight-part form so that one copy may also be filed with the state tax department and one with any applicable local tax authority.
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