It’s January, and that means we’re all in the throes of yet another tax season. This time of year is stressful for all taxpayers trying to gather the required tax documentation before the April 15th deadline. However, for business owners who are also employers, there’s an added responsibility when turning the calendar to a new year: W-2 forms.
Also known as the Wage and Tax Statement, the W-2 is a required government document used to report an individual’s tax earnings as well as outline a year’s total withheld tax amounts for both state and local governments, Social Security and Medicare. During employment, the form is used by the Internal Revenue Service to calculate tax burden. However, upon retirement, this earnings record is also used by the Social Security Administration to pinpoint eligibility and benefits.
What You Should Know When Creating Your Employees’ W-2 Forms
Unlike many other tax forms, most individual taxpayers don’t generate a W-2 for themselves. Instead, employers will prepare these documents for their workers, making it essential to understand the process and specific IRS protocols before completing the form (no pressure). If you’re an employer tasked with generating W-2 forms this year, it’s critical to go into the process armed with as much information as possible to protect your employees and your business. Here are five things to remember when preparing your W-2s:
The first step in creating W-2 forms is identifying which workers in your organization should receive one. Business owners are only required to complete W-2 forms for employees, not independent contractors. If you hire freelancers, consultants, or independent contractors and pay them more than $600 in a single tax year, you’ll need to complete a 1099 form instead of a Wage and Tax Statement.
Mark The Calendar
Some employers assume that the deadline for generating these forms is anytime before April 15th. However, this isn’t the case. The government requires employers to complete W-2 forms on or before February 1st to ensure employees have the availability to file their returns before the tax deadline. Additionally, a copy of the document must also be sent to the Social Security Administration by the February 1st deadline to verify the employee’s return.
Understand Who Gets What
Employees must prepare and distribute six copies of every W-2 for each employee as follows:
- Employees: Copy B, Copy C, Copy 2
- Social Security Administration: Copy A
- State Tax Authority (if required): Copy 1
Finally, you’ll want to keep Copy D for your records.
Follow The Instructions (Carefully)
Proper data entry is crucial when generating IRS tax forms. When filling out a W-2, carefully follow the instructions provided by the IRS to help minimize mistakes. Some of the data you will need to gather for each document includes:
- Employee name, address, and SSN
- Your business name, address, Employer Identification Number, and State Identification Number
- Total wages, tips, and compensation
- Total taxes in each category
- Elective deferrals
- Total taxable cost of employer-paid health or life insurance
If a mistake is made when filling out the form, it’s important to rectify the documentation as quickly as possible. Minor errors may result in “safe harbor” relief, receiving no penalties.
Minimize Non-Compliance Risk
Understanding some of the non-compliance penalties can help protect your business during tax season. There are several factors to consider when preparing W-2s for employees. Companies filing more than 250 W-2s in paper form may incur a fine. Additionally, submitting documents that can’t be read by a machine can also result in a penalty. Filing a 1099-MISC for someone who should receive a W-2 or deliberating failing to submit a W-2 for an employee who requires one can also have financial consequences to your business.
Set Your Business Up For Tax Season Success
Bookkeeper Express delivers DIY payroll and accounting services that automate day-to-day activities and tax operations to keep your business compliant with ever-changing state and government regulations. Contact us today to learn more about using our solutions to maximize efficiency and minimize risk at your organization.
Contact Bookkeeper Express Today
Have you started 2021 financial and HR planning for your business? Bookkeeper Express can help. Contact us today to learn more about our DIY bookkeeping and outsourced accounting solutions.