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W-2/1099 safe harbor begins to take shape

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in Office Management,Payroll Management

The new safe harbor for de minimis errors on W-2s and 1099s gets its first test drive with forms filed this year. But, according to the IRS, it’s payees (employees for W-2 purposes and independent contractors for 1099 purposes) who are in the driver’s seat. They may elect that the safe harbor not apply.

The IRS also clarified that the safe harbor applies only to inadvertent errors, and not to intentional errors that misreport dollar amounts. It also doesn’t apply if you fail to file forms or provide payees with their copies. (Notice 2017-09, IRB 2017-04)

Safe harbor redux. Under the safe harbor, you’re not liable for penalties for failing to file correct forms and failing to provide payees with correct forms if the error for any single amount is $100 or less or $25 or less if the error involves tax withholding or backup withholding. You don’t have to send corrected forms to payees, unless they ask for them, but you remain on the hook for penalties if payees request corrected forms. In addition, you’re under no obligation to notify payees of any de minimis errors.

Electing against the safe harbor. Payees can elect at any time that the safe harbor not apply. Payees may also revoke their elections at any time by providing you with a written notice.

You may prescribe any reasonable procedure that payees must use to make elections, including on paper, electronically or by phone. However, an online election can’t be the only option. Payees must be notified of your reasonable procedure. If you don’t do anything, payees can send their elections to the address on their W-2s or 1099s. Payees’ elections must meet these criteria:

  • They must clearly state that they are electing out of the safe harbor.
  • They must provide their names, addresses and Taxpayer Identification Numbers.
  • They must identify the type of form to which their elections apply.
  • They must state the duration of their elections (i.e., that they apply only to the current year or to all future years).

If payees don’t identify the form or the calendar year, you must treat their elections as applying to all information returns you’re required to file and to all years.

If you provide payees with corrected forms and file those forms with the Social Security Administration or the IRS within 30 days of the date of their elections, you will be treated as having reasonable cause for your error and penalties won’t apply.

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