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!

Fringe Benefits: What You Need to Know

As an employer, you want to ensure your employees are happy and thriving in your business. From time to time, you may even reward them for a job well done. But before you give a reward that’s outside the scope of their pay rate, think twice.

Welcome to the world of fringe benefits.

What are fringe benefits?

Fringe benefits are any form of payment that is considered compensation beyond your employee’s normal pay rate. This could include property, services or cash.

Why do I need to think twice?

Often, fringe benefits are taxable to the employee. And if it’s taxable, you have to report it on the employee’s W-2.

Fringe benefits that are taxable include:

  • Vacations
  • Personal use of an employer-provided vehicle
  • Gym memberships
  • Bonuses
  • Moving expenses (those in excess of your qualified expenses)
  • Group term life insurance
  • Gift cards

This is by no means an exhaustive list, but it should at least get you thinking.

What else do I need to know?

When we talk about fringe benefits, we’re often talking about value. The IRS has a little rule called de minimis fringe benefit, otherwise known as “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.”

In other words, when you talk about value in regard to de minimis fringe benefits, if the benefit is so small it makes reporting it impractical, you don’t have to worry about it. And before you ask, there’s no specific dollar amount given.

One thing to remember is that cash or cash-equivalent gifts are NEVER non-taxable. For example, gift cards have an easily ascertainable value and can be redeemed for merchandise or a cash equivalent. So they need to be reported as part of an employee’s wages.

If you give items that are not cash, you will more than likely utilize fair market value. For instance, say you have a drawing during your company holiday party and an employee wins a 60 inch TV. This would not be considered de minimis and would need to be included in their income so taxes could be withheld. In this instance you can easily ascertain the value of the TV.

In the above example, you utilize fair market value. However, there are items that don’t have an easily discernible value. In that case, look at what a willing buyer would pay for that particular item. If you need a little more help, the IRS lays out guidelines for the valuation of certain items, like the lease of an employer-provided vehicle. You can find more information on that here.

So what would be considered de minimis?

So what would be considered de minimis? An example would be giving each of your employees a T-shirt, turkey, or something similar in value. The key here is that it HAS to be something tangible (as a reminder, this doesn’t mean cash or anything with a value attached … even a $5 gift card counts).

The moral of the story?

Fringe benefits are a great way to reward your employees and help you stand out from your competition. However, you need to be careful that you’re actually reporting these benefits as part of your employee’s wages.

Things that Should Scare Small Business Owners

HalloweenWhen you’re running a business, there are a lot of things to consider. From payroll to people to marketing, you have a lot on your plate. In fact, we’re guessing there’s more than a few things that keep you up at night.

There are all sorts of scares lurking around the corner when it comes to owning and running a small to mid-sized business. Here are a few of the ones we find particularly frightening:

You hire without doing your research.

It’s true, you wear a lot of hats as a small business owner. It’s also true that quite a few of those hats are ones you don’t know anything about. Small business owners normally get into business because they have a dream to pursue, not to worry about the day-to-day details of running a business.

To solve that problem, you hire quickly for areas you don’t know anything about. Sounds good right? Not so fast …

  • Are they qualified? When you don’t know anything about the position you’re hiring for, you don’t know if the person (or consultant) is qualified to take on that role. For example, if you’re thinking about hiring someone to look at your financials, do you want a bookkeeper or a CFO? Or somewhere in between? There are several differences, including experience, duties and even pay.
  • How do you measure success? If you don’t know anything about the subject or position you’re hiring for, how do you measure success for that individual? How do you know your expectations and proposed timelines are reasonable?
  • Have you checked all the boxes when it comes to hiring? Another thing to consider is the entirety of the hiring process. Maybe you found the perfect candidate and you want them to start right away. But have you taken into account the necessary steps when it comes to hiring? There are several forms to fill out, items to consider and that pesky thing called onboarding. All of this has to be taken into account before you make that hire.

We’re all for hiring (whether it’s an employee or a consultant) to help you run your business. Just make sure you do the research and know what you want and need in order to help your business run more effectively.

You don’t take your financials seriously.

Having up-to-date, accurate financials is of paramount importance. If you don’t, you’re in for a world of hurt. Without it, you don’t know how much money you’re making (or losing), nor can you even begin to understand the basic state of your business.

Further, you won’t be able to make strategic business decisions and set a course for the future of your business. Plus, financial information is pretty important to creditors, investors and buyers.

Only 40% of small businesses say they are “extremely” or “very knowledgeable” in accounting and finance. (source)

Bookkeeping is not as simple as just throwing numbers into a spreadsheet. You need to understand basic accounting terminology in order to make informed decisions. For instance, just because your books say there’s money coming in, doesn’t mean you’re in the clear. Cash flow and profit are two different things.

The solution? Invest in accurately tracking your business financials. Find a consultant or hire an accountant (once you’ve done your research) who can help you navigate your current situation and also look out for potential pitfalls.

You don’t have accountability.

Success matters to small businesses, especially in the early stages of your company. But what does success mean? Can you define it in a measurable way? Can your employees?

Businesses work when roles are defined and individuals understand their performance expectations. That’s why it’s important to have KPIs (key performance indicators) in place for your company and your employees.

It’s here where we remind you that KPIs are quantifiable measurements for critical success. Quantifiable is key as it helps you track progress and whether or not you’re accomplishing your goals. If you’re not tracking, then you have no idea if it’s working or if you need to find ways to improve.

You don’t value your product … or yourself.

Let’s start with the basics … one of the keys to starting a business is that you have a product or service people actually want. Once you’ve got that, the next step is pricing it effectively.

Often, business owners play the cheapest option game to get their product into the market. This path undermines the real value of your product. Plus, it’s a lot of work to come back from under pricing your product.

Take the time, instead, to do some market research and really find a price point that shows the value of your product and also allows for market entry. Also, ensure the price point you’ve chosen will help your business financially … which is why it helps to have up-to-date financial information from the beginning.

But let’s not forget about YOU. In addition to your product’s value, you have value as the business owner. At the beginning you’re trying to do it all. It’s important to realize when you’re in too deep and you need help.

“Your new venture demands that every aspect is handled by someone who understands what they’re doing. And no amount of good intention will turn an IT specialist into a good bookkeeper.” (source)

The moral of the story here is to value yourself. Value your time, know your strengths and why you got into business. Let someone whose passion is for numbers or marketing or HR or whatever the subject may be handle the tasks you need done. And remember, if you don’t want to hire someone full time, you can always outsource it.

You’re not playing by the rules.

To say there are more than a few updates to rules and regulations affecting small businesses each year would be an understatement. Did you know, for instance, the General Services Administration annually updates the federal maximum per diem rates? This update would affect any business that has employees travel for work.

Or did you know that several states and cities are now introducing mandatory paid sick leave policies? If you have workers, your policies (if your business is in any of the affected areas) will have to align with this new ruling.

These are just a few examples of the rules and updates small business owners face on a regular basis. Many of these rules directly affect your financials, how you report information about your company and its customers and the benefits and rights your employees get.

That’s why it’s important to know what’s going on and ensure you’re in compliance. Find a consultant who can stay on top of these updates and regulations and ensure your business is following the rules.

 

 

 

 

 

 

The Importance of Classifying Workers

Recently, the IRS released a fact sheet to help remind small businesses of the importance of correctly classifying workers. Sometimes IRS lingo can be complicated, so we broke it down for you.

Let’s start with the question that’s probably going through your head – why does this matter?

When you classify your workers, this can help determine if you need to withhold income, social security and Medicare taxes. It also helps determine if you actually have to pay these taxes on employee wages. When it comes to independent contractors, businesses usually don’t have to withhold or pay taxes. If you’re not classifying correctly, you can get stuck with some harsh fines and penalties.

So how do you determine if the individual is an independent contractor or an employee? One general rule to follow is that your worker is an independent contractor if the business has the right to control only the result of the work, not how the work will be done. However, there are three categories that can help you make your determination.

Behavioral Control

A worker is considered an employee when the business gets to be bossy. Okay, maybe bossy isn’t the right word, but the business does have the right to direct and control the work being done. Behavioral control can be broken down into a few more distinct categories:

  • Type of instructions – This can include telling the employee where to work, when to do the work and how the work should be done.
  • Instruction complexity – The higher the complexity of the instructions given, the more likely it is the individual is an employee. When the instructions have less detail, this gives the worker more control to do the job how they see fit, which points towards the worker being an independent contractor.
  • Evaluation – How a business evaluates the work can help determine if the worker is an employee or contractor. If the details of how the work was done are evaluated, then the worker is likely an employee. However, if only the end product is being evaluated, it’s more likely you have a contractor.
  • Training – This one is fairly simple. Would you like someone else telling you how to do your job? If a worker is an employee, the business has the authority to do just that. For independent contractors, they are the experts and generally don’t require training from the hiring company.

Control over Finances

This category looks at what control the business has over the financial and business pieces of the worker’s job. Factors to consider include:

  • Equipment investment – Independent contractors are much more likely than employees to make significant investments in the equipment they are using to get the job done. Employees are often provided equipment from their employer, rather than investing in it on their own.
  • Expense reimbursement – Businesses generally reimburse expenses for their employees, not for independent contractors.
  • Availability – Independent contractors generally have the freedom to seek out more business opportunities, while employees work is usually contained to the one business.
  • Payment – This one is easy to understand. When you have employees, you usually guarantee them a regular wage. With independent contractors, a flat fee is usually agreed upon and paid on the completion of the work.

Relationship Elements

What the business or worker offers in the relationship can also determine classification. Some key elements to consider are:

  • Contracts – Written contracts which describe the relationship the parties plan to create are a fairly simple way to determine which type of worker the business has. However, it’s important to note that a contract stating the worker is a contractor or an employee isn’t enough on its own to classify the worker’s status.
  • Benefits – Insurance, retirement, vacation and sick pay are benefits provided to employees. It’s rare for these benefits to be given to independent contractors.
  • Forever or just a fling – The length of time of the relationship can help determine a worker’s status. When an employee is hired, the expectation is that the relationship is long term. For contractors, the relationship isn’t permanent. Instead, both parties enter the relationship with the assumption of a certain amount of time for the work to be completed.

When businesses wrongly classify their workers, they are still liable for the related taxes and payments for those workers, and may even face other sanctions. Correctly classifying your workers helps you avoid this, making it easier for you to run your business.

We know this stuff can be kind of confusing – and even scary. But don’t fear! We are here to help.. just ask!

 

1099 Basics – In July

That’s right, it’s never too early to start the process of preparing your 1099s (you will thank us come January). Here are a few tips to start preparing those 1099s.

Who do I prepare 1099s for?

The simplest answer for the most common type of 1099, the 1099-MISC, is they need to be prepared for anyone that provided services to you. However, they are not given to someone who is an employee (here’s your refresh), and you need to have paid them $600 or more for the year (we’re talking accounting, legal, janitorial services, repairs, snow removal or lawn maintenance, etc. unless the company is incorporated). If the company is incorporated, then a 1099-MISC is not required, except with lawyers … then you still get to fill out the form.

Other items reported on a 1099-MISC include rent paid to an individual or a business that is not incorporated, royalties of $10 or more, other income payments including prizes and awards, employee wages paid after death in the year following death, director fees, etc.

Another common 1099 form is the 1099-INT. This form is required for interest paid of $10 or more, any foreign tax on interest withheld and paid, or backup federal withholdings regardless of the amount of the interest payment.

Please note, this is a very simplified list of items that 1099s need to be issued for. IRS.gov has several booklets that go into more detail on what is required and instructions for each form is available. On their website, type 1099 instructions in the search box and a list of forms and instructions will pop up.

So what am I supposed to do in July?

Identifying the vendors that need 1099s now will save you a lot of headache come year end. You can do this by having each of your vendors complete and return to you a Form W-9 (also found on IRS.gov). This form will give you their business name, address, tax identification number and type of entity. Best practice is to have all of your vendors complete this form, even if you know they will not be providing services to you. If circumstances change and you are required to provide a 1099 to them in another year, then you are already prepared!

Once the W-9s are returned, you can begin updating your records so when it comes time to complete your 1099s you will have the correct name, address, and TIN on file. You should also flag your vendors so it accumulates the amounts for you. Many accounting programs, such as QuickBooks, allow you to indicate the vendor will need a 1099 at the end of the year. Most also allow you to indicate the type of form and which box the amounts should be reported in. Having your system set up to accurately do the work for you will save tons of time at year end.

If all of these suggestions are followed, you should have time in January to put your feet up on your desk and relax because you won’t be spending hours trying to find vendor information and trying to figure out the amounts to report.

If you have questions, we’re always here to help.

Is it Time to Upgrade?

Accounting software is a great tool for your business. It helps you keep track of invoices, let’s you see where are your money is going and even allows you to access your information basically anytime, anywhere.

But if your accounting software is out of date, it actually might be doing more harm than good for your business. Here are some signs that it might be time to look into an updated system.

  • Are you still communicating with vendors and customers through email or even *gasp* snail mail? If so, it may be time to look for a system that provides an easier way to communicate.
  • If your desk is covered in papers and you have paper invoices and timecards coming out your ears, it’s time to stop endangering the tree population and look into a system that can do this electronically.
  • It might be time to look into some new software if your system doesn’t allow you to look at your information anytime, anywhere. This includes your cell phone – many systems allow you to have all of your information at the swipe of a finger.
  • Is your chart of accounts endless? Or, maybe you need to create a whole new set of accounts each time you add another profit or cost center (grants, jobs, products lines, etc.). Either way, both are major signs that it’s time to upgrade and update.
  • Your account system should do what you need it to, without you having to perform extra steps and work arounds. If your system is doing the exact opposite of its intended purpose, it’s time for something new.
  • If your vendor has completely stopped (or won’t be for much longer) supporting your software, you’ll need to upgrade. Although this sounds pretty obvious, we see this problem quite often!
  • It’s time to upgrade to a new system if you’re still using spreadsheets to track date and compute calculations. (Hint: accounting software does this for you!)
  • Here’s a big one. Do you enter manual journal entries – maybe you’ve even compiled them in your spreadsheets? Are you operating in several systems that don’t sync together? Time to get on board with a new, updated system!
  • Consider how much time you are devoting to closing the books each month. If you’re manually creating reports and manually completing the consolidation process, you’re wasting your time. An updated system can help you save your time to dedicate to other parts of your business.

If any of these common warning signs sound like something you are experiencing, now is probably a good time to start looking for new, updated accounting software. Although the transition won’t be easy, the benefits to your business will be worth it!