W-2’s used to be simply the device on which you totaled the amounts you paid your employees. They have now become much more sophisticated reporting devices. Not only is there a significant amount of additional information necessary, but much of that information will cause the amounts reported on the W-2’s (and the quarterly returns) to be something other than a simple totaling of your wage payments.
This document is intended to be instructive to you as you gather the necessary records for complete and accurate reporting. Below we’ve noted a number of issues to be aware of as you start assembling your wage and withholding information.
Due Dates and Return Filing
The W-2 forms must be furnished to employees and filed with the Social Security Administration by January 31, 2018. The employees’ mailing deadline is satisfied if the W-2’s are properly addressed, mailed and postmarked by January 31, 2018. If any W-2’s are undeliverable (e.g., returned to you by the post office) you should keep them for four years (e.g., until January 31, 2022). Do not send undeliverable Forms W-2 to the Social Security Administration.
There are penalties for late filing. Penalties for filing less than 30 days late are $50 per W-2; for filing more than 30 days late, but before August 1, 2018 are $100 per W-2; and if filed after August 1, 2018, are $260 per W-2. Remember that one form goes to the recipient and one goes to the IRS. Each form (and each copy of a form) will incur a separate penalty. Accordingly, if you are found to have not filed a 1099, the penalty would be $520. Additionally, if your failure to file is deemed by the IRS to have been caused by an intentional disregard of the filing requirements, the IRS will assess an additional penalty of $1,060.
If you have more than 250 W-2’s to file, there are special additional rules including more disclosures and a requirement to e-file the W-2’s.
Additional Disclosures Required
In addition to the normal wage payments, there are additional disclosures required. In past years, you may have seen on your own W-2 that box 12 contained codes A-E which represented different types of fringe benefits. This list has expanded to A-EE. If you have any of the following types of amounts involved in your company’s compensation plan, you will need to add additional disclosures:
A – Uncollected social security or RRTA tax on tips.
B – Uncollected Medicare tax on tips.
C – Taxable cost of group-term life insurance over $50,000 (included in boxes 1, 3 (up to social security wage base), and 5).
D – Elective deferrals to a section 401(k) cash or deferred arrangement. Also includes deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement.
E – Elective deferrals under a section 403(b) salary reduction agreement.
F – Elective deferrals under a section 408(k)(6) salary reduction SEP.
G – Elective deferrals and employer contributions (including non-elective deferrals) to a section 457(b) deferred compensation plan.
H – Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan.
J – Nontaxable sick pay (information only, not included in boxes 1, 3, or 5).
K – 20% excise tax on excess golden parachute payments.
L – Substantiated employee business expense reimbursements (nontaxable).
M – Uncollected social security or RRTA tax on taxable cost of group-term life insurance over $50,000 (former employees only).
N – Uncollected Medicare tax on taxable cost of group-term life insurance over $50,000 (former employees only).
P – Excludable moving expense reimbursements paid directly to employee (not included in boxes 1, 3, or 5).
Q – Nontaxable combat pay.
R – Employer contributions to your Archer MSA.
S – Employee salary reduction contributions under a section 408(p) SIMPLE plan (not included in box 1).
T – Adoption benefits (not included in box 1).
V – Income from exercise of nonstatutory stock option(s) (included in boxes 1, 3 (up to social security wage base), and 5).
W – Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria plan) to your health savings account.
Y – Deferrals under a section 409A non-qualified deferred compensation plan.
Z – Income under section 409A on a non-qualified deferred compensation plan.
AA – Designated Roth contributions under a section 401(k) plan.
BB – Designated Roth contributions under a section 403(b) plan.
DD – Cost of employer-sponsored health coverage. The amount reported with Code DD is not taxable.
EE – Designated Roth contributions under a governmental section 457(b) plan. This amount does not apply to contributions under a tax-exempt organization section 457(b) plan.
FF – Permitted benefits under a qualified small employer health reimbursement arrangement.
Cafeteria (Flexible Benefit) Plans
If you have a plan in place which allows employees to withhold funds from their paychecks to purchase benefits on a pretax basis, additional reporting and calculations are required. You will need to calculate the amount each employee withheld for their costs and how much was spent for each type of benefit. This calculation can affect both the W-2’s and the employer’s quarterly tax forms. Benefits qualifying for this favorable treatment may include health insurance premiums, disability insurance premiums, medical expense reimbursements, dependent care expense reimbursements and group-term life insurance premiums (limited to $50,000 death benefit). Beginning in 2013, each employee can withhold no more than $2,500 per year.
If you have a retirement plan which allows employees to elect to redirect otherwise taxable wages to a tax deductible retirement plan (401(k), 403(b) or SIMPLE) on a pre-tax bases or to a Roth 401(k) or 403(b) plan (on an after-tax bases), you will need to report the amounts the employees had withheld from their paychecks and into which type of account it was deposited. This calculation can affect both the W-2’s and the employer’s quarterly tax forms.
It is imperative that you read the instructions carefully regarding which employees should have “retirement plan” box checked. You could cause your employee to be over-taxed or audited if you check the box incorrectly.
Health (HSA) and Medical (MSA) Savings Accounts
Done correctly, an employer’s contributions to either of these accounts on behalf of an employee are not includible in taxable income and as such are exempt from income and FICA tax withholding. The contributed amounts do, however, need to be reported on the W-2. However, there are strict non-discrimination rules which must be followed, as well as strict “notice” and “contribution” requirements. Failure to abide by these rules will result in an excise tax of 35% being levied on you, the employer. Thus, if you have made any contributions to your employees’ accounts, please let us know so that we can (a) test the contributions to ensure compatibility, (b) help you meet the “notice” and “contribution” requirements, and (c) help with reporting compliance.
Employees’ amounts withheld for these accounts, from payroll checks, on n after-tax bases are not exempt from income and FICA tax withholding. Insofar that they can benefit from deducting these amounts on their personal tax returns, they will need to be given the withholding information. This can be accomplished on the Form W-2. Amounts withheld on a pre-tax basis are considered to be employer contributions and need to be added to any employer contribution amounts (as noted above). These amounts are not subject to the above-noted “non-discrimination,” “notice” and “contribution” rules.
S Corporation Health and Accident Insurance
Accident and health insurance premiums (which now include long-term care insurance and Medicare insurance premiums) paid by the business on behalf of a more-than-2% S Corporation shareholder/employee are deductible to the corporation. There are, however, certain provisions that must followed to the letter:
- The premiums must be either paid by the corporation or reimbursed to the shareholder by the corporation in the current year. This reimbursement must be made in cash. An adjusting journal entry to a shareholder will not suffice;
- The premiums must be added to the shareholder’s W-2. They are subject to Federal and state withholding although they are not subject to either Social Security or Medicare taxes;
- The actual cash wages must be at least as much as the insurance premiums; and
- The shareholder gets to deduct the premiums as an adjustment on page one of the shareholder’s individual income tax return.
The information noted below is needed to accurately report each 2% shareholder employee’s income:
- Total cost of premiums for 2% shareholder/employee (and their family);
- Amounts withheld from the 2% shareholder/employees’ paychecks; and
- Whether the full amount of the premium was paid by the corporation or was reimbursed to the employee.
Generally, if an employer-provided car is used by an employee for personal purposes (including driving to and from work), the value of the personal use must be included as wages on the employee’s W-2. Taxes (income and FICA) must be withheld from the employee’s wages and the employer (1) matches the FICA taxes and (2) also includes the wage amounts in the FUTA tax calculations. The employer must determine the value of the personal use. Fortunately, the IRS gives us a number of easy-to-administer methods to compute it.
The following questions need to be answered for each incidence of an employer-provided vehicle in order to determine the value of personal use for a particular vehicle/employee:
- Vehicle make/model
- Date placed in service for this employee
- Cost (fair market value)
- Is it new or used
- Total miles driven during the year
- Total business miles driven during the year (this does not include to and from work)
- Were any vehicle expenses paid personally? If so, how much?
- Was it available for use during off-duty hours?
- Was it used primarily by a more-than-5% owner or related person?
- Is another vehicle available for personal use?
We can assist you in performing these calculations and in fulfilling the reporting requirements.
Employee Business Expenses
If an employer requires an employee to substantiate the business expenses for which they are seeking reimbursement, the employer does not have to induce those reimbursements in the employee’s income. This serves three purposes: 1) the employer knows what business activities an employee is engaging in, 2) the payroll process is simplified and 3) both the employer and employee saves taxes (FICA and income). If the employee is not required to substantiate the expenses to the employer, the full amount of the reimbursement must be reported on the employee’s W-2 and taxes need to be withheld. To claim the deduction, the employee must include the expenses on his or her own tax return and substantiate them to the IRS. If you have any questions about this provision, please call us about an “accountable plan.”
Dependent Care Benefits
Compensation paid by an employer in the form of dependent care assistance plan needs to be reported on Form W-2.
Group-Term Life Insurance
Compensation paid in the form of group-term life insurance on the life on an employee is not taxable to the employee if the death benefit of the life insurance policy is not greater than $50,000. If the benefit is greater than $50,000, an amount must be included in the employee’s income and reported on the employee’s W-2. The amount(s) to be included on the W-2 is not simply a pro-rate portion of the premium. To calculate this taxable benefit we need to know:
- The employee’s name;
- The employee’s age at year-end;
- The amount of the death benefit (by month, if it varies); and
- The number of months of coverage.
Key employees are eligible for this $50,000 exclusion only if the life insurance is provided under a plan that does not discriminate in favor of key employees as to eligibility or the amount. This means that if you are not making the payments for all of your full-time employees, your key employees may not be eligible for the exclusion. In addition, premiums paid by an employer on individual (not group) policies are income to the employee and subject to withholding.
Employees Who Had No Federal Income Taxes Withheld
If, in 2017, you had an employee whose Form W-2 shows no Federal income tax withheld, you must now notify the employee that he or she may be able to claim an income tax refund because of the Earned Income Credit program. This notification can be accomplished by either using the official IRS Form W-2 (which has the EIC notice on the back of Copy B) or by issuing a substitute Form W-2 with the same statement.
If you paid your employees’ share of income and FICA taxes rather than deducting them from their wages, you must include the total amount of those taxes paid as a part of the employees’ wages. (This is very common in bonuses.) The total wages are then subject to income and FICA tax. We can help you calculate the amounts to enter on the W-2.
The withholding and reporting for household employees is generally very different than that described above and there is an entirely different set of rules that apply. Please call us to discuss these rules.
Before you make any payments of a deceased employee’s wages, please call us. There are a number of differences in how such wages are treated.
Additional Medicare Tax
Beginning with 2013, each employer is required to withhold an additional 0.9% Medicare tax on any FICA wages it pays to an employee in excess of $200,000 per year. The employer is not required to match this additional Medicare tax.
Please call us if you have any questions about your particular payroll arrangements. We provide a wide variety of services that allow us to tailor a solution to your needs.