Tips for Form W-2

As tax season rolls around, it’s important to have all your information ready. Not only will you feel more organized, but you’ll be able to provide your employees with all the information they need to file their own personal taxes.

One of the key pieces you’ll need to have for each of your employees is Form W-2.

What is it?

It’s an information form used to report federal and state taxable wages, taxes withheld, and other fringe benefit information to your employees. Information on this form is used by both the taxpayer (that’s your employees) in preparing to file taxes and the IRS to match records to the taxpayer’s tax return.

Do all my employees get one of these?

An employer legally must send out W-2 forms to each of its employees to whom they pay a salary, wage or other form of compensation.

If you need a refresher on who is an employee, go here.

Form W-2 must be filled out if you did any of the following:

  • Withheld any income, Social Security or Medicare tax from wages. This is regardless of the amount of wages.
  • Paid $600 or more in wages, even if you did not withhold any income, Social Security or Medicare tax.
    • Before you get too excited, this only applies to certain classes of employees, such as election workers or foreign ag workers.
  • Would have had to withhold income tax if the employee had claimed no more than one withholding allowance or had not claimed exemptions from withholding on Form W-4.

What do I need to do on the forms?

Form W-2 is made up of multiple parts, all of which is necessary for the taxpayer and the IRS.

Box 1 – Wages, tips and other compensation

This box is for the total taxable wages, tips and other compensation you paid your employee during the course of the calendar year. It includes the following:

  • Total wages
  • Bonuses (including sign-on bonuses) and awards
  • Total noncash payments, including certain fringe benefits
  • Tips reported by the employee to the employer
  • Certain employee business expense reimbursements
  • The cost of accident and health insurance premiums paid on the behalf of a S corp 2% shareholder
  • Taxable benefits from a section 125 plan if the employee chooses cash
  • Employee contributions to an Archer MSA
  • Employer contributions to an Archer MSA (if includible in the income of the employee)
  • Employer contributions for qualified long-term care services (if the coverage is provided through a flexible spending or something similar)
  • Taxable cost of group-term life insurance above $50,000 (above $2,000 for dependents)
  • Payments for non-job related education expenses
  • Employee’s share of Social Security and Medicare taxes if you paid them on their behalf
  • Designated Roth contributions made under a section 401(k) plan, a section 403(b) salary reduction agreement, or a governmental section 457(b) plan.
  • Distributions to an employee or former employee from an NQDC plan (or a nongovernmental section 457(b) plan.
  • Amounts includible in income under section 457(f) because the amounts are no longer subject to a substantial risk of forfeiture.
  • Payments to statutory employees who are subject to social security and Medicare taxes but not subject to federal income tax withholding.
  • Cost of current insurance protection under a compensatory split-dollar life insurance arrangement.
  • Employee contributions to a health savings account (HSA).
  • Employer contributions to an HSA if includible in the income of the employee.
  • Amounts includible in income under an NQDC plan because of section 409A.
  • Payments made to former employees while they are on active duty in the Armed Forces or other uniformed services.
  • All other compensation, including certain scholarship and fellowship grants.

 

Box 2 – Federal income tax withheld

This one’s pretty self-explanatory. Here we’re talking all federal income tax withheld from an employee’s wages for the calendar year.

 

Box 3 – Social Security Wages

This is the total wages paid (before payroll deductions) that are subject to employee social security tax. This, however, does not include social security tips and allocated tips (you get to save that for Box 7).

Items subject to employee social security tax, and therefore should be included in Box 3 are:

  • Signing bonuses
  • Employee business expense reimbursements
  • Taxable cost of group-term life insurance over $50,000
  • Employee and non-excludable employer contributions to an MSA or HSA except those made through a cafeteria plan.
  • Employee contributions to a SIMPLE retirement account
  • Adoption benefits

As a note, the total of boxes 3 and 7 (Social Security Tips) can’t exceed $127,200, as this is the maximum social security wage base for 2017.

 

Box 4 – Social Security Tax Withheld

Here we’re looking for the total employee social security tax withheld, including social security tax on tips. As a reminder, only includes taxes withheld for 2017.

 

Box 5 – Medicare wages and tips

Similar to box 3, this is where you record the wages and tips that were subject to Medicare tax. Wages that are subject to this are the same as those listed in box 3. The only difference? There’s no wage base limit to Medicare tax.

 

Box 6 – Medicare tax withheld

Here’s where you put the total of the Medicare tax withheld for 2017, including any additional Medicare tax withheld (there is an additional Medicare tax of 0.9% on taxable wages that exceed $200,000 for an employee in a calendar year).

 

Box 7 – Social security tips

Separate from box 3, this is where you show the tips your employee reported to you. All tips need to be recorded here, even if you did not have enough employee funds to collect social security tax for the tips.

And remember, the maximum amount for boxes 3 and 7 (combined) cannot exceed $127,200.

But wait, there’s more …

  • Box 8 – Allocated tips: The tips allocated to your employees
  • Box 9 – Verification code: If you’re participating in the W-2 Verification Code Initiative, the verification code goes here.
  • Box 10 – Dependent care benefits: This is the box for total dependent care benefits paid or incurred by you for your employee. This includes fair market value of daycare provided by you.
  • Box 11 – Nonqualified plans: The purpose of this box is to determine if any of the amounts in boxes 1, 3 or 5 were earned in a prior year. The Social Security Administration uses this information to ensure they have paid the correct amount of social security earnings.
  • Box 12 – Codes: The purpose of this box is to report the amounts for various fringe benefits to the employee along with the code to denote what fringe benefit it pertains to. For instance, 401k contributions made by an employee would be reported with a code of D. The IRS has a list of all of the codes along with a description for each one in the General Instructions for Forms W-2 and W-3, which can be found on the IRS website.

 The moral of the story

These forms matter, as they’re used by your employees, the IRS, Social Security Administration, and the state and local government. It’s your legal responsibility as an employer to provide each of your employees with a W-2 that accurately reflects the above items.

Yes, these forms can be confusing and time consuming. But it’s important to ensure they’re done correctly. If you need help, ask your business advisor for guidance. Or, come see us. We’re here to help.

 

 

Gift Giving & Taxes

The holiday season is nearly here, and you might be starting to think about gift giving this year. If you’re planning on thanking your employees for their great work throughout the year with gifts, or maybe even a holiday party, there are a few tax rules you should keep in mind.

In general, all types of compensation are subject to income tax – unless excluded by the tax code.

De Minimis fringe benefits may allow employers to provide holiday gifts of property – not cash or cash equivalents – with a low fair market value, without the employee having to pay additional taxes on the gift. De Minimis (reminder found here) in simple terms refers to something too minor or small to be considered. In other words, it is something small enough it is not practical to track or administer the value and has little to no impact on the employees’ income.

The frequency and availability of these gifts can determine whether or not they are considered de minimis.  As a general rule, as long as all employees are receiving the same gifts, the frequency isn’t an issue.

Some items that do qualify as de minimis fringe benefits and gifts – and are therefore excludable from income tax – include:

  • Traditional holiday gifts with a low fair market value. This includes your turkeys, hams or any other small non-cash
  • Occasional cocktail parties – this means your company holiday party, employee picnics, etc.
  • Occasional sporting event or theater tickets.
  • Occasional coffee, donuts and snacks in the office.
  • Special occasion gifts, such as sympathy flowers.

Each of the above items include a time frame… occasionally. These small gifts are considered excludable as long as they are not being given on a regular or excessive basis.

Now that we know what is excludable, let’s take a look at what is considered taxable.

The larger the gift, the better the chance it is taxable compensation. For example, if you’re considering giving your employees season tickets to see their favorite football team, those tickets are considered taxable and must be reported as income.

Other examples of taxable gifts include:

  • Gifting your employee a weekend away at an employee-owned facility, such as a hunting cabin or timeshare.
  • Providing your employee a membership in a country club or a gym.
  • Allowing your employee to use a company vehicle for commuting or other personal use more than one day a month.

Some employers provide some of these benefits throughout the year, while others may give them for the holidays. If you’re planning on giving any of these gifts, make sure you include them as income!

You might have noticed we haven’t touched on a very common gift employers give for the holidays – gift cards, gift certificates and even cash.

When it comes to gift cards, certificates and cash, the rule is pretty straightforward: no matter how large or small the amount, it will always be taxable (with a few small exceptions of course). If you’re thinking of giving your employee a $5 Target gift card or even a $500 general use gift card, you guessed it – it must be reported!

The moral of the story? Pay attention to the value of your gifts to make sure you’re in compliance. If you want to give your employees great gifts but aren’t quite sure what you should be reporting, let us know. We are here to help you and your employees have a great holiday season!