W-2 Forms, 1099 Forms and year-end practices, procedures

Form W-2 and the 1099 series of forms are called information returns. Withheld income and FICA taxes are reconciled quarterly when you file your Form 941 with the IRS. They’re reconciled again, annually, when you file a Form W-2 for each employee with the Social Security Administration (SSA). 

Paper Forms W-2 and a transmittal form, Form W-3, must be filed by Feb. 28. Employers filing 250 or more forms must file electronically by March 31.  By Jan. 31, employees must be provided with copies of their W-2 forms. Corrections to W-2s are made on Form W-2c. Independent contractors to whom you’ve paid at least $600 must receive Form 1099-MISC by Jan. 31. Paper 1099-MISC forms are due to the IRS by the last business day in February. Employers filing 250 or more forms must file electronically by March 31.

Employees may receive electronic W-2 forms, instead of paper forms. E-forms may be posted to the company’s website or delivered as attachment to e-mails. Electronic filers who use the SSA’s W-2 Online program may deliver a copy of those electronically filed forms to employees (W-2 Online is discussed later). Alternatively, electronic W-2s may be formatted to the specifications that apply to substitute forms.  The IRS publishes those specifications every year in Pub. 1141

Regardless of whether you use the SSA’s W-2 Online application to create your electronic forms, or format e-forms yourself, employees must consent to electronic delivery. Their consent, or your confirmation of their consent, must be via the web or email and must reasonably show that they can access their forms. You must confirm employees’ consent if they consent on paper. A second consent is required if hardware or software changes would impede access to their forms. Employees may withdraw their consent at any time. 

The following information must be disclosed prior to, or at the same time as, employees’ consent:

  • how they may obtain paper forms;
  • whether consent continues from year-to-year, or applies to one year only;
  • how forms will be provided if they are terminated;
  • how they can update their personal information; and
  • the hardware and software specifications needed to access the forms.  

You must notify employees that their forms are posted on the company’s website. The notice must tell employees how to access and print their forms. This statement, in capital letters, must be included: “IMPORTANT TAX RETURN DOCUMENT AVAILABLE.” (If your notice is emailed, place the statement in the subject line and send it with high importance.)

W-2s must remain on the company’s website through Oct. 15 of the year they’re issued. If W-2s are delivered electronically, W-2c forms must also be delivered to employees electronically.  

How to file W-2s with the SSA

W-2s may be filed on paper or electronically. If you file 250 or more forms, you must file electronically, unless the IRS grants you a waiver. Waivers are requested by filing Form 8508. An initial 30-day extension of time to file with the SSA is available by filing Form 8809 with the IRS. A second 30-day extension of time to file is also available; a new Form 8809 must be filed with the IRS. However, an extension of time to file doesn’t extend the time you have to provide employees with their copies of Form W-2. 

Electronic filing is accomplished through the SSA’s Business Services Online (BSO) suite of services. You must register with the SSA to access BSO. Once registered, e-filers get a PIN/user ID and a password. Files to be sent/uploaded must conform to the EFW2 specifications.

The SSA also has a free, web-based W-2 program, called W-2 Online. W-2 Online allows you to save up to 20 W-2s per W-3 report, with no limit on the number of sessions. W-2 Online automatically prepares printable copies of W-2s for employees, or you may proceed through the electronic delivery rules and e-mail (or post) employees their copies. 

Reconciling Forms W-2, W-3 and 941

The amounts you report on your four 941 forms to the IRS must match the amounts you report on W-2/W-3 forms.  If they don’t match, and there’s no valid reason for the mismatch, you will have a reconciliation problem on your hands.  Valid reasons for mismatches include the following:

  • fraction-of-cents adjustments made on 941 forms;
  • sick pay adjustments;
  • corrections to fourth-quarter 941 forms that became apparent after the form was filed;
  • end-of-year bonuses that weren’t included on the last 941 form filed; and
  • taxable fringe benefits that will be treated as received the following year under the special accounting rule, but were shown as current-year payments in error. 

When the Social Security and/or Medicare Wages reported to the SSA are lower than the Social Security and/or Medicare Wages reported to the IRS, SSA contacts the employer. The SSA will forward unresolved cases to the IRS for further investigation and enforcement action, if necessary. 

Correcting W-2 Forms 

If it’s necessary to correct a W-2 form before you file it with the SSA, mark the Void box on Copy A of the original form and prepare a new form for the employee. Write “Corrected” on the employee’s copies only.

If it’s necessary to correct a W-2 form after you file it with the SSA, you must file Form W-2c and Form W-3c, which is the transmittal. Employees must receive copies of W-2c forms as soon as possible. W-2c forms may be filed on paper or electronically. If you must file 250 or more Forms W-2c, you must file them electronically.  Forms should be filed as soon as errors are discovered. However, penalties for filing incorrect W-2 forms increase substantially (from $30 per form to $50 per form) if W-2c forms aren’t filed by Aug. 1. 

Electronic W-2c forms must be formatted to the specifications that appear in the SSA’s publication EFW2C.  Alternatively, W-2c filers may use the SSA’s online program C W-2c Online. You can complete up to five W-2c forms per session, with no limit on the number of sessions. The program also prepares employees’ copies. 

Filing 1099 Forms

The Forms 1099 series of information returns may be filed with the IRS on paper or electronically. Filers of 250 or more of any single type of 1099 (there are many 1099 forms in the series) must file those forms electronically. Paper forms must be filed by the last business day in February; electronic forms are due by March 31. A 30-day extension of time to file is available by filing Form 8809. Recipients must receive their forms by Jan. 31. Recipients who consent may receive their forms electronically.

The IRS has a Taxpayer Identification Number (TIN) matching program, which allows likely 1099-MISC filers to request that the IRS match the payee’s name/TIN. The program is an online, interactive program that provides matches for up to 25 requests. 

Use Form 1099-MISC to report the following payments: 

  • Payments of $600 or more for fees, commissions, and other payments to persons who aren’t your employees for services they provided to your trade or business. Note: With a few exceptions, you don’t need to provide 1099-MISC forms to service providers who do business as corporations.
  • Prizes, awards, or other payments of $600 or more that are paid to employees, but aren’t paid for services rendered.
  • Royalty payments of $10 or more, or payments of $600 or more for rents (other than rent payments to real estate agents).
  • Withheld federal income taxes on miscellaneous income, under the backup withholding rules.
  • Payments of $600 or more to physicians or providers of health care services in connection with medical assistance plans, or health, accident, and sickness insurance plans.
  • All punitive damages, damages for non-physical injuries or sickness, compensatory damages for employment discrimination or defamation, and any other taxable damages.
  • Damages that accompany an award or settlement of an employment discrimination lawsuit (e.g., damages received on account of emotional distress, including physical symptoms such as insomnia, headaches, and stomach disorders).
  • Liquidated damages under the Age Discrimination in Employment Act (ADEA).
  • Regardless of amount, compensation-related payments made to non-employee ex-spouses.

FAQs

1.  An employee is also on the company’s the board of directors. How do we report her director’s fees—on a separate 1099-MISC form, or combine the fees with her wages on her W-2 form?  

Inside directors, when they’re acting in their directorial capacity, aren’t employees. Their fees, therefore, aren’t subject to income tax withholding, or to FICA and FUTA. If fees exceed $600, report them on Form 1099-MISC; inside directors also receive W-2s reporting their wages, benefits, etc.

2.  An employee got married, but never updated her Social Security card to reflect her married name. We review all W-2s prior to distributing them, and saw that her W-2 is in her maiden name. We told her about this and suggested that she apply for a new Social Security card, but she insists that her W-2 carries her married name. Who’s correct? 

You are. It is important that the name/Social Security number (SSN) match the data the SSA has in its system.  So the usual advice to Payroll managers is that they don’t change payroll records until the employee presents a new Social Security card. This employee isn’t out of luck, though. She and her husband can file their 1040 with her maiden name. She can then file Form SS-5 with the SSA. 

However, if she manages to complete a name change with the SSA prior to you filing your W-2s, mark the Void Box on Copy A of the original W-2 and provide her with corrected copies. Be sure to write “Corrected” at the top of her copies. If she presents you with a new Social Security card after you file your W-2s, you’ll need to file a W-2c form. 

3.  A couple of months ago, the business reorganized. We received a new Employer Identification Number (EIN) in the process. Which EIN – the old one, new one, or both – must be included on employees’ W-2s?

Show only the company’s current EIN on employees’ W-2s. The SSA, however, needs more complete information. Therefore, on your W-3, be sure to include both the old and new numbers. The current EIN is shown in Box e, Employer’s identification number (EIN); the old EIN is shown in Box h, Other EIN used this year. 

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