One of the gifts your business keeps on giving is the gift of FORMS. Owning and running your own business comes with a great deal of paperwork, including several forms related to your employees. In the spirit of the season (tax planning season that is), we’re going to break down a few of these forms and things to watch for, especially since several of them will have an impact on you, and your employees’, tax liability.
Before we begin, we’d like to preface with the following: many of these mistakes are simple and easily avoidable if you take the time to truly walk through the form. We know there are a lot of things to fill out when you run a business, but taking a few extra minutes now will save you a lot of headache later on.
Now on with the form tutorial …
What is it?
It’s a type of information form, meaning it’s a document used for reporting purposes based on certain transactions incurred throughout the year. Information on these forms is used to assist both the taxpayer (that’s your employees) in preparing to file taxes, as well as the IRS to match records to the taxpayer’s tax return.
Who gets it?
The W-2 tax form shows the amount of taxes withheld from a paycheck for the year and is used for both federal and state taxes. An employer legally must send out W-2 forms to each of its employees (if you need a refresher on who is an employee, go here) to whom they pay a salary, wage or other form of compensation.
Employers must file a W-2 for wages paid to each employee for whom:
- Income, social security or Medicare taxes were withheld
- Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholidng on Form W-4.
When do I need to do this?
As the employer, you must send the employee a W-2 form on or before January 31st each year. This ensures the employee has ample time to file everyone’s favorite thing (taxes) before the April 15th deadline.
Well that seems pretty straightforward …
There are several common W-2 reporting errors that can wreak real havoc. Here are some thing to watch for:
- Incorrect or missing employer identification number
- Incorrect employee names and SSNs
- Omission of decimal point and cents from entries
- Using ink that is too light – use only black ink
- Entries made that are too small or too large (Use 12-point Courier font, if possible)
- Dollar signs added to the money amount boxes
- Inappropriately checking the “Retirement plan” checkbox in box 13
- Misformatting the employee’s name in box e. Enter the employee’s first name and middle initial in the first box, his or her surname in the second box, and his or her suffix (such as “Jr.”) in the third box.
Errors on the W-2 form can also cause issues with reports. So make sure to watch for these errors:
- Use of maximum social security or Medicare wage amounts for a prior year – instead of for the tax year being reported.
- Use of social security maximum yearly wage amount for Medicare wages.
- Decimal mistakes in money fields; i.e. “4800” which is treated by SSA as $48.00 – instead of
- Tips included in the social security wage field as well as in the social security tip field.
- Omitted wage or tax fields on wage reports.
And one more for good measure. If you’re filling out paper Form W-2, make sure that you watch out for these common mistakes:
- Prior tax year form used.
- Unscannable reports
- Failure to file Copy A of Form W-2 with SSA
- “Void” indicator on Form W-2 checked in error
Again, these are often simple and easily avoidable mistakes. Ensure the accuracy and clarity of the information and take your time now, to avoid wasting your time in the long run with costly cleanup. When in doubt, ASK. Even the simplest tax form can be complex. Avoiding errors on these forms might just be one of the best gifts you give yourself (and your employees) this tax season.