Chapter 8

DEPOSITING AND REPORTING WITHHELD TAX

Chapter 8

8.1 Employer Identification Numbers

To ensure all payments are credited to the correct employer, an EIN is assigned

How to get an EIN? Application online – able to get and use EIN

immediately By Fax-TIN – EIN issued within 4 business days By Phone – able to get and use EIN immediately Paper form SS-4 – 4 to 5 weeks for receipt of EIN If EIN not received in time for quarterly/annual filing,

write “APPLIED FOR” in EIN space and date of application

8.1 Employer Identification Numbers

Mergers, consolidations & reincorporationProper EIN to use after a corporate merger

or acquisition depends on its characterization under the Internal Revenue Code.

If a reorganization, use the previously assigned EIN

A new EIN is required if a new company merges as a result of the reorganization if it does not qualify as a reorganization by IRS rules

8.2 Depositing Withheld Income & Employment Taxes

Taxes are not necessarily paid when filing a returnMust deposit the taxes per the IRS’ assigned

frequency Payroll Tax Deposit Rules

Based on the look back period Example 1: For calendar year 2014 the look back period is July

1, 2012 to June 30, 2013 Monthly

If total tax liability for the look back period equals $50,000 or less

Semiweekly If total tax liability for the look back period exceeds

$50,000

2013 Look back Period 2014 Look back Period

3rd qtr 2011 - $12,0004th qtr 2011 - $12,0001st qtr 2012 - $12,0002nd qtr 2012 - $12,000

$48,000

Total employment tax liability

$48,000 < $50,000= Monthly

Depositor

3rd qtr 2012 - $13,0004th qtr 2012 - $13,0001st qtr 2013 - $13,0002nd qtr 2013 - $13,000

$52,000

Total employment tax liability

$52,000 > $50,000= Semi-Weekly

Depositor



Nonpayroll withholding treated separatelyEmployers must also withhold federal income

from “nonpayroll” payments it makes, including: Reportable payments subject to backup withholding Gambling winnings Retirement pay for service in the Armed Forces Pension, annuities, IRAs & other deferred income

These are all reported on Form 945 annually. They are not included on the quarterly 941.

Very small employers with annual tax liability of $1,000. or less would file a Form 944 and pay liability annually

IRS only sends depositor status notices to employers with a change in their deposit schedule for the upcoming tax year



New EmployersClassified as monthly depositors because they have no tax

liability experience during the look back period OR until they accumulate more than $50,000. in tax liability during a look back period OR trigger the one-day rule

Look back period begins on first day of operations and ends on the next June 30.

Successor EmployersSuccessor company with the same EIN as predecessor

company has the same deposit frequency as the predecessor.

Successor company with new EIN is considered a monthly depositor.


Railroad & Farm employers File annual employment tax returns rather than

quarterly Look back period is the second calendar year

preceding the current calendar year Agricultural employers may have both farm and

nonfarm employees Will file both Form 943 and Form 941 Separate determinations for depositor status


Must be paid by

The 15th of the following month

Monthly Deposit RequirementsAccumulated tax liability for the calendar month


Must be paid by

The following Wednesday

Semiweekly Deposit RequirementsWages paid on Wednesday, Thursday & Friday

Must be paid by

The following Friday

Semiweekly Deposit RequirementsWages paid on Saturday, Sunday, Monday &

Tuesday


Must be paid by

The close of the next business day

One-day deposit ruleAccumulated tax liability reaches $100,000 on any day during a deposit

period


One – day Deposit RuleIf accumulated employment tax liability

reaches $100,000 on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next business day

Monthly depositors then become a semiweekly depositor for the remainder of the current calendar year and the entire next calendar year.


Quarterly “de minimis” deposit ruleAccumulated tax liability of less than $2,500

for any quarter can be deposited according to the employer’s depositor status or pay with their Form 941

Effective in 2010, this safe harbor also applies if the tax liability was less than $2,500 for the immediately preceding quarter.


Form 944 – Annual employment tax liability reporting for small employers

Employment tax liability of $1,000 or less qualifies small employers for this annual filing.

Employers are notified by the IRS of their qualification for the Employers’ Annual Federal Tax Program (EAFTP)

Tax liability is paid with a timely filed Form 944Not held to the monthly or semiweekly depositor

statusesIf liability of $1,000 is exceeded, employer is no longer

qualified; however, will still file Form 944 for that calendar year & Form 941 for the succeeding years


Saturday, Sunday and holiday extension If the due date of the deposit is not a business day (Saturday,

Sunday, or a federal legal holiday), the deposit is due on the very next banking day

Semiweekly depositors are guaranteed at least 3 business days after the last day of the semiweekly period to make their deposit *If any of the 3 days is not a business day, the

employer has an additional day to deposit


Shortfall ruleIRS allows a “safe harbor” shortfall so employers are

not penalized for depositing a small amount less than the entire amount of the deposit obligation and not be penalized

Obligation is satisfied if the shortfall is no more than the greater of $100 or 2% of the entire amount due All deposits must be made timely & shortfall is deposited by the

appropriate make-up date. Monthly depositors – shortfall must be deposited by the 941 due

date Semiweekly depositors – shortfall must be deposited by the 1st

Wednesday or Friday occurring on or after the 15th of the month after the month during which the original deposit was due


Timeliness of deposits

Generally, deposits are considered timely by the IRS if received via EFTPS and the amount is withdrawn from the employer’s account on or before the due date


How to Deposit Payroll Taxes

Electronic Deposits have now replaced FTD coupons

A provision of the North American Free Trade Implementation Act (NAFTA) amended the IRC & requires the implementation of an Electronic Federal Tax Payment System (EFTPS) for the collection of federal depository taxes.

Exception: Does not apply to employers with total employment liability of less than $2,500. Payment is made with Form 941 or 944.


EFTPS requirements

Organizations that deposit more than $200,000 in total federal tax deposits in any year must use EFTPS to make all their federal deposits beginning with the first return period in the second succeeding calendar year.

Once an employer is required to file electronically, it cannot go back to using paper coupons.


Electronic Federal Tax Payment SystemEmployers that are required to deposit

electronically must use EFTPSEnrollment: New business taxpayers are pre-enrolledNewly required taxpayers enroll with Form 9779,

Business Enrollment form for EFTPS or online at www.eftps.gov

Enrollment verifies company info & notifies the IRS of the deposit method selected EFTPS-Direct (ACH Debit) EFTPS-Through a Financial Institution (ACH Credit)


Paper DepositsEmployers who are not required to use

EFTPS may use federal tax deposit coupons and pay check, cash or money order.

Along, with the deposit the employer must provide the bank with a completed Form 8109, Federal Tax Deposit Coupon

Non-payroll withheld taxes and FUTA payments are made the same way if there is no EFT requirement.


Penalties for Failure to Deposit on Time 2% x undeposited amount for 1-5 days 5% x undeposited amount for 6-15 days 10% x undeposited amount for > 15 days 15% x undeposited amount if not paid within 10 days after

the ER receives its first IRS delinquency notice

Special Rule for electronic depositors:An employer required to deposit electronically, that

uses a paper coupon & check is subject to the 10% failure-to-deposit penalty because it failed for more than 15 days to make the deposit in the correct manner, even though the paper deposit was made timely


Employer ReliefIRS allows for instances to waive penalties

for late deposits:IRS may waive the failure-to-deposit penalty

for an employer’s inadvertent failure to make a deposit with certain criteria

IRS may also waive the failure-to-deposit penalty if the employer can show reasonable cause

Deposit changes were mandated by the IRS Restructuring & Reform Act of 1998

Require IRS to apply deposits to the most recent period within the tax period to which the deposit relates

Shortfall rules: The payment is treated as a liability for a deposit period IMMEDIATELY BEFORE the shortfall make-up date and after the end of any other deposit period ending before the shortfall make-up date

Penalty notices for specific tax period – can contact IRS within 90 days and redesignate where the deposit is to be applied.


Redesignating estimated tax payments as employment tax deposits• If employer determines its corporate income

tax liability for the current tax year will be less than the amount of estimated income tax payments already made, the employer can redesignate some of the estimated income tax it has paid as employment tax deposits


Employer can avoid an averaged failure-to-deposit penalty by: Monthly payer – verify monthly liability section of

Form 941 is completed properly Semiweekly payer – verify the Schedule B is properly

completed (tax LIABILITY dates are to be used instead of tax PAYMENT dates)

If employer is a semiweekly payer per IRS rules and does not complete a Schedule B, the penalty is computed by taking the total adjusted tax liability and distributing it equally throughout the period


IRS can … and WILL … apply a 100% penalty for not withholding and paying taxesKnown as the “Trust Fund Recovery Penalty”

or the “100% Penalty” Responsible person must have acted willfully in not

withholding and paying over withheld income and employment taxes

Notice must be given at least 60 days before IRS can issue a notice & demand for payment of penalty

The liability for the penalty can be shared PEO’s can face trust fund penalties as well


Criminal Penalties can also be assessed If found guilty, the person(s) are guilty of a felony and

can be fined up to $10,000. and/or imprisoned for up to 5 years

Penalty and interest notices must be detailed – part of IRS Restructuring & Reform Act of 1998 Include name of penalty IRC section under which it is imposed Computation of the penalty If interest is imposed, must include IRC section and

calculation of the interest


8.3 Form 941Who Must File Form 941

Employers exempt from filing Form 941 Seasonal employers that do not pay wages regularly Businesses that withhold federal income tax from only

nonpayroll items Employers that report only withheld taxes on

domestic workers Employers that report only wages for employees in US

territories Agricultural employers Employers that have an annual employment tax

liability of no more that $1,000 & file Form 944

8.3 Form 941Who Must File Form 941

Business Reorganizations If an employer sells or transfers its business, a separate Form 941

must be filed by both the previous and current owners Each must only report the wages it paid and taxes it withheld

Statutory merger or consolidation of two businesses Surviving corporation must file Form 941 for the quarter during

which the change took place, reporting for both companies The reporting results in discrepancies between the amounts shown

on the surviving corporation’s Forms W-2 and 941 for the year of the merger or consolidation

Surviving corporation should file Schedule D (Form 941) Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations with final 941 of year

8.3 Form 941Completing the Form

Form 941 is scannable Created so that it can be scanned by IRS Scanning requires conformity Substitutes that follow the format will be acceptable

Forms should not be submitted to the IRS for specific approval

Software developers and form producers send in a PDF format to assist the IRS in preparing to scan the forms

Beginning 1 Qtr 2011, no business packages will be mailed out by IRS. To get forms, go to www.irs.gov.


Completing Form 941 12-point Courier font Omit dollar signs Enter dollars to the left of the pre-printed decimal

points & cents to the right Use of commas is optional Leave blank any data field with a value of zero Enter negative amounts using a minus sign, if

possible, otherwise use parentheses Enter the employer’s name & EIN on all pages &

attachments Staple multiple sheets in the upper left corner for

filing


Form must have employer’s signature Owner, if sole prop Principal corporate officer, if corporation or LLC

(treated as a corp) Authorized member or partner of an unincorporated

association or partnership (including LLC treated as a partnership)

Owner of a single member LLC A fiduciary if the employer is a trust or estate


Forms signed by agents Agent obtains authorization from the IRS by having

the employer designate the agent on Form 2678, Employer / Payer Appointment of Agent

Attorney, accountant, other representative or employee must obtain a proper power of attorney by completing Form 2848, Power of Attorney and Declaration of Representative


Third party can discuss form with IRS Employer must check the “Yes” box in Part 4 of Form

941 and Enter the name, phone number, & 5-digit personal

identification number of the third party This authorizes the designee to:

Provide the IRS with any missing information from the Form 941

Call the IRS for any information about processing Respond to the IRS concerning IRS notices that the

employer has shared with the designee about math errors on the form and return preparation


Does not authorize the designee to receive a refund check

Bind the employer to anything or otherwise represent the employer

Designation expires one year from the due date of the Form 941

Can be revoked beforehand by either the employer or designee


Alternative signature methods 1998 – IRS Restructuring and Reform Act – Electronic

signatures 2005 – Facsimile signatures allowed This procedure is primarily a convenience for payroll

service providersNew Employers

Yet to be assigned an EIN should type the words “Applied For” and the date of the application in the EIN space provided on the form


Employers going out of business Check the box on Line 18 when completing its last

Form 941 & enter the last date on which wages will be paid

Attach a statement showing the address where the employer’s records will be kept, name of the person keeping the records, & if business was sold, the name & address of the new owner


Claiming the COBRA credit on Form 941 American Recovery and Reinvestment Act of 2009 Refundable payroll tax credit Taxes to offset:

Employee federal income tax withholding Employee share of social security & Medicare taxes Employer share of social security & Medicare taxes

If the COBRA credit taken exceeds the amount of the employer’s payroll tax liabilities, the employer is entitled to a tax refund from the US Treasury or a credit to the next quarter


Form 941 was amended in 2009 by adding Lines 12a and 12b. 12a = amount of the credit being claimed 12b = number of eligible individuals who paid the

discounted COBRA premiumEmployers can claim the credit as soon as the

eligible individual pays the 35% discounted premium

IRS will apply the full amount of the COBRA credit reported on Line 12a & treat it as deposited on the 1st day of the quarter; each deposit thereafter will be treated as timely up to the amount of the credit


Look back period is unaffected Computed from Line 8 of Form 941 – Total Taxes After

Adjustments – before taking into account any credits.Next Day deposit rule applies to employment

tax liability prior to applying the credit to the payment

COBRA credit does not have to be taken in the quarter in which it was paid, can be taken in a later quarter in the same calendar year or on Form 941-X for the quarter in which the subsidy was provided


COBRA credit does not affect Schedule B reporting Schedule B (Form 941) is used to report an employer’s tax

liability for each time it makes payments subject to employment taxes, not the amount of the tax deposits

For Monthly depositors, the monthly tax liability totals reported in Part 2 of Form 941 is unaffected

Employers must maintain supporting documentation related to the discounted subsidy claim; currently IRS does not require reporting of these items other than the offset amount (list on page 8-31)


Payments made with Form 941 For employers that qualify with employment tax liability of

less than $2,500 in the current or preceding quarter Include Form 941-V, Form 941 Payment Voucher with the

employer’s Form 941 and include the following: EIN or “Applied For” if unassigned Darken the oval for the quarter Employer’s name & address Amount paid

These employers cannot take advantage of the 10-day extension granted to employers that have deposited their entire tax liability on time throughout the quarter

Payment can be made via phone or internet using a credit or debit card.

If filing Form 941 via e-file, you can e-pay balance due using a tax preparation software or through a tax professional. This payment is known as EFW – Electronic Funds Withdrawal.

And, of course, you can ALWAYS pay using EFTPS!


8.3 Form 941When & Where to File Form 941

FORM 941 FILING DEADLINES

QUARTER QUARTER ENDS

941 DUE DATE AUTOMATIC EXTENSION

JAN – MAR MARCH 31 APRIL 30 MAY 10

APR – JUNE JUNE 30 JULY 31 AUGUST 10

JULY – SEPT SEPTEMBER 30 OCTOBER 31 NOVEMBER 10

OCT – DEC DECEMBER 31 JANUARY 31 FEBRUARY 10

If the Form 941 due date falls on a Saturday, Sunday or legal FEDERAL holiday, the due date becomes the next business day.


Mailed Forms 941 Considered filed on the date of the postmark on the

envelope by the USPS and can be timely filed even if received after the due date

“Post Mark Rule” – applicable for IRS designated PDS (Private Delivery Service)

Important to retain certified mail receipts to serve as proof of timely filing

Proof of mailing vs proof of delivery Certified or registered mail are the only way to prove

mailing & support the presumption that a document has been delivered even if the IRS shows no record of receipt

IRS provides addresses for mailing paper Form 941 in the Form 941 instructions


8.3 Schedule B (Form 941)

Filed by: Semiweekly depositors Monthly depositors that accumulate at least $100,000 in

employment tax liability during a monthRecords an employer’s payroll tax liability on the

date payments were made subject to payroll taxes Not deposits made Not recorded on date paid

IRS uses it to determine if the employer has deposited its federal employment tax liabilities on time

8.3 Schedule B (Form 941)

Amending a previously filed Schedule B Semiweekly depositor: If an employer has been

assessed a failure-to-deposit penalty for a quarter & made an error on Schedule B that will not change the total liability for the quarter that was reported on Schedule B may be able to reduce the penalty by filing a corrected Schedule B

Monthly depositor: Employers can also file a Schedule B if they have been assessed a failure-to-deposit penalty for a quarter & made an error on the monthly tax liability section of Form 941. Only the correct monthly totals should be entered, daily entries are not required

File Amended Schedule B with the Form 941-X for a tax decrease or a tax increase ONLY.

Allocation Schedule for Aggregate Form 941 Filers

Form released in 2010

Filer has to be approved by the IRS as an agent to file this form

8.3 Schedule R (Form 941)

IRS has offered employers advice to help them avoid the most common errors made when completing Form 941.

At the bottom of Page 8-43 and top of 8-44 in your book is the list adapted for the 2013 Form 941

8.3 IRS Advise on Avoiding Form 941 Errors

8.3 Form 945

IRS developed Form 945, Annual Return of Withheld Federal Income Tax and removed all nonpayroll items from Form 941 This was done to reduce the complexity of Form 941 &

ease the reconciliation among Forms 941, W-2 & W-3Form 945, businesses report amounts

withheld throughout the year from nonpayroll items Also report total deposits of these nonpayroll withheld

taxes & any amount withheld but not yet deposited for the form is completed

8.3 Form 945

A monthly summary of tax liability is reported on Form 945 Lines A-L with the total being entered on Line M Completed by monthly depositors with at least $2,500

Semiweekly depositors complete Form 945-A, Annual Record of Federal Tax Liability Also monthly depositors that accumulate at least

$100,000 in nonpayroll withheld taxThird party can be designated

8.3 Form 945

When & where to file Form 945? Due on January 31st of the following year Extension to February 10th if all deposits are made

timely throughout the year Mailing address is provided in the Form 945

instructions

8.3 Form 941-M

Monthly reporting for Delinquent Employerso Effective January 1, 2012, the IRS no longer requires

employers that continuously fail to withhold or deposit taxes or file returns on time to report employment taxes monthly rather than quarterly, using Form 941-M, Employer’s Monthly Federal Tax Return.

The IRS declared the monthly filing and special deposit procedures obsolete and said employers who had been required to use those procedures must file Form 941.

8.3 Form 941-PR & 941-SS

Form 941-PR is filed by employers with employees in: Puerto Rico

Form 941-SS is filed by employers with employees in: American Samoa Guam Northern Mariana Islands Virgin Islands

Each of these forms is used to report an employer’s liability for social security & Medicare taxes, but not federal income tax withholding Form 941 must also be filed to report federal income tax

withholding

8.3 Domestic Employees

Individuals hiring domestic employees must report & pay both employer & employee share of social security & Medicare taxes on wages it pays these employees on their personal tax return, Form 1040, on Schedule H Threshold requirement is $1,800 per year for 2013 Employer must withhold, report & pay federal income tax if the

employee requests it. Household employers are required to make payments of

withheld taxes throughout the year.Sole prop who file Form 941 for business employees

may report the household employee wages on Form 941 as well if the $1,800 threshold is met

8.3 Form 943 – Annual Reporting by Agricultural Employers

Employers of farmworkers Must withhold federal income tax & withhold and pay social

security & Medicare taxes on farmworker wages Annually report the wages paid & taxes withheld on Form 943

A monthly summary of tax liability is reported on Form 943 Lines A-L with the total being entered on Line M Completed by monthly depositors

Semiweekly depositors complete Form 943-A, Agricultural Employer’s Record of Federal Tax Liability Also monthly depositors that accumulate at least $100,000 in

payroll tax liabilityWhen & where to file?

Due date is January 31 of the following year

8.5 Form 944 – Annual Reporting by Small Employers

2006 – Employers’ Annual Federal Tax Program (Form 944) (EAFTP) was developed by the IRS Benefited small employers by reducing the filing

burden2008 – Employers were notified by the IRS if

they were eligible for the program Required to file Form 944 until they were no longer

eligible2009 – IRS changed the rules to make EAFTP

voluntaryAnnual employment liability of $1,000 or less

qualifies employers for eligibility


Opting out of the Program - In 2010, employers who wish to opt out of the program, must do so by calling or writing the IRS & get written confirmation that their filing requirement has been changed Call by April 1 Postmarked written request by March 15

Opting into the program – In 2013, employers that believe they are eligible to file Form 944 and wish to do must request notification of their eligibility from the IRS. Call by April 1 Postmarked written request by March 15


Minimal differences between the 944 & the 941 No question regarding the number of employees on

the payroll on any specified date If total employment tax for the year is $2,500 or more,

each month’s liability must be indicated in Part 2 There is no check box for seasonal employers


When & where to file? Due date is January 31 of the following year Qualifies for 10-day automatic extension if all deposits

have been made on timeCorrecting Form 944

On or after January 1, 2009, corrections should be made on Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund

Prior to January 1, 2009, corrections should be made on Form 941c, Statement to Correct Information

8.6 Making Corrections / Adjustments

Form 941-X used to correct the following: Wages, tips & other compensation Income tax withheld from compensation Taxable social security wages Taxable social security tips Taxable Medicare wages and tips Advanced EIC payments made to employees

Not used to correct number of employees reported


Form 941-X due dates are dependent upon when the error was discovered & if taxes are over- or under-reported Underreported taxes discovered in:

Q1 due by April 30 Q2 due by July 31 Q3 due by October 31 Q4 due by January 31 The final deadline for filing is 3 years from the date the original Form 941

was filed Overreported taxes final deadline is 3 years from the date the

original Form 941 was filed or 2 years from the date you paid the tax reported on Form 941

Can request funds in two different ways: Credit to next quarter liability, or Refund mailed to the employer


Form 843, Claim for Refund and Request for Abatement Prior to 2009, this form was filed with Form 941c to

request a refund of overpaid taxes In 2009 & beyond, Form 941-X replaces both forms

However, Form 843 should still be used to request a refund or abatement of assessed interest or penalties

8.7 Penalties for Late Reporting and Paying Tax

Late filing of employment tax returns results in an “addition to tax” 5% of the tax shown on the return for each month the

return is late up to the maximum of 25% (higher % if fraudulent)

Failure to pay employment taxes results in an “addition to tax”

Additions to tax, civil penalties & interest are not the only penalties employers face Criminal fines & imprisonment can also be enforced


Late filing of employment tax returns results in an “addition to tax” 5% of the tax shown on the return for each month the

return is late up to the maximum of 25% (higher % if fraudulent)

Failure to pay employment taxes results in an “addition to tax”

Additions to tax, civil penalties & interest are not the only penalties employers face Criminal fines & imprisonment can also be enforced


1998 – IRS Restructuring and Reform Act, IRS penalty & interest notices have to include details as to how they were determined & also including: Name of the penalty IRC section under which it is imposed Computation of the penalty

8.8 Information Reporting for Employees

Should a Form W-2 be provided? IRC requires a Form W-2 to be provided by any employer

engaged in a trade or business that pays compensation to an employee for work performed, even if the employee is not paid in cash

IRC requires Form W-2 if the employer withheld federal income tax from the employee or would have done so if the employee had claimed no more than one withholding allowance

IRC requires Form W-2 reporting for all wages, as defined for federal income tax withholding purposes and for all noncash compensation provided to an employee that is not subject to withholding, if the total of the wages and the noncash compensation is at least $600 in a calendar year


Surviving corporation after a merger or consolidation issues W-2’s for all employees during the year

Successorship options: Standard: Predecessor makes final payment of wages &

reports the wages on Form W-2; successor reports only the wages it pays

Alternate: Successor provides Forms W-2 for all wages & taxes from both parties; predecessor only issues Forms W-2 for employees who did not work for the successor after the acquisition – Requires each company to file Schedule D to explain discrepancies between their Forms 941 and W-2


Special problems in providing Forms W-2 Undeliverable Forms W-2: The employer has been

unable, after reasonable effort, to deliver the employee’s copies; it must keep those copies for 4 years

Reissued Forms W-2: If an employee loses a Form W-2, the employer can issue a new copy to the employee and should write “Reissued Statement” on it unless the form is provided to the employee electronically

Corrected Forms W-2: If Copy A has not been sent to the SSA, the employer provides the employee with corrected copies of the Form W-2 with “CORRECTED” written on them


When & where to furnish Form W-2 Copy A, Form W-2 is an information return & must be

sent to the SSA Paper copy due by February 28 Electronically due by March 31 (this was extended by the

IRS Restructuring and Reform Act of 1998) Copies B, C & 2, Form W-2 are the employee’s copies;

these information statements must be sent to the employee by January 31 of the following year Copy B – Employee Federal copy Copy C – Employee’s Records Copy 2 – Employee State or Local copy


Employer can provide copies electronically with the employee’s consent Employer must provide the employee with a clear

statement containing the required disclosures Electronic copy must contain all the required

information as a substitute statement Must be accessible by January 31 Employee must be notified by January 31 the

electronic copy is available Employer must maintain access to the electronic copy

through October 15 of the following year


Substitute Forms W-2 are acceptable as long as they meet IRS requirements & maintain the core information

Miscellaneous Form W-2 Issues Hyphenation – Employer EIN & Employee SSN must

contain hyphens Dollar amounts – Entered without commas or dollar

signs, but with decimal points & cents portion shown Electronic reporting – Employers filing 250 or more

Forms W-2 for a calendar year are required to file them electronically

8.9 Information Reporting for Employers to SSA

Providing Wage & Tax Info to the SSA – Form W-3 If filing paper W-2 (Copy A) with the SSA, Form W-3,

Transmittal of Wage and Tax Statements Form W-3 contains totals of the amounts reported on

the employer’s W-2 forms, acting as a “reconciliation” of those forms

Form W-3 not for electronic filers; employers that file electronically do not file a transmittal document

8.9 Information Reporting for Employers to SSA

When and where to file Form W-3? Due date for filing is the same as Copy A of Form W-2

with SSA – last day of February Mailed with all Copy A Forms W-2

W-2c consists of six parts, same as the W-2Copy A of Form W-2c must be sent to the SSA

along with Form W-3c which totals the information from all the W-2c forms being submitted

Electronic filing requirement applies only for the immediate prior year

8.11 The Reconciliation Process for Employers

With the differing aspects to the tax collection, payment & reporting process – it is imperative that employers keep track of each step and its relationship to the others

To help prevent “out-of-balance” conditions and reduce their confrontations with federal and state tax agencies, employers must periodically “reconcile” their wage and tax information


If an employer’s totals from its four quarterly Forms 941 do not agree with the totals from its Forms W-2 the IRS or SSA will inquire as to why & expect corrections to be made

These amounts include: Social security wages Social security tips Medicare wages and tips Advanced EIC payments


If an employer’s totals from its four quarterly Forms 941 do not agree with the totals from its Forms W-2 the IRS or SSA will inquire as to why & expect corrections to be made

These amounts include: Social security wages Social security tips Medicare wages and tips Advanced EIC payments

8.12 Information Returns for 1099 Series

Pension and Retirement Plan Distributions – Form 1099-R Payers who make distributions of retirement income

must report those payments and any amount withheld for federal income tax on From 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance contracts, etc

Distributions from all types of retirement plans must be reported on Form 1099-R

Must report taxable and nontaxable amounts distributed; gross distribution is entered in Box 1, taxable amount in Box 2a, & the nontaxable amount in Box 5


Pension and Retirement Plan Distributions – Form 1099-R Determining Taxable & Nontaxable amounts:

All employee contributions to a qualified retirement plan, as well as employee pre-tax contributions plus the earnings on all plan contributions are included in the taxable amount of a distribution

The nontaxable amount is the portion of the distribution attributable to employee after-tax contributions, which were already taxed as wages before the contribution was made


Designated Roth contributions Effective in reporting year 2006, trustees must

report the year when the employee began making designated Roth contributions from a 401(k) or 403(b) plan in the box, “1st year of design. Roth contrib.”

Designated Roth account distributions that are not qualified distributions must be reported on form 1099-R, with distribution code B in Box 7. Use code Q for qualified distributions from a Roth IRA. The employee’s basis in the distributions is reported in Box 5.


Direct rollovers: Payers making a direct rollover of a plan distribution must

report the amount distributed on Form 1099-R as it would any other distribution

The payer must also add a distribution code in Box 7 identifying the distribution as a direct rollover

Filing form 1099-R Copies B, C and 2 of Form 1099-R must be sent to the payee by

January 31 of the year after the year during which the distributions were made

Paper Copy A due by February 28, with transmittal Form 1096 Electronic Copy A due by March 31 Electronic filing is required if filing 250 or more Forms 1099-R

8.13 Penalties for Incorrect or Late Information Returns & Statements

Failure to File Information returns Penalties are assessed against employers or payers that file

information returns with the IRS or SSA: After the due date “Failure to file timely” Incorrect/Incomplete Info “Failure to file correct information”

The severity of the penalty generally depends on how late the return is filed or how late the correct or complete info is provided

Willful failures bring higher penalties Payers can be sued for filing fraudulent returns Agency allows for a small number of incorrect or

incomplete returns corrected at no cost Insignificant errors are not penalized No penalty for errors due to reasonable cause

8.13 Failure to Provide Information Statements to Employees

Employee Statements if not provided to an employee or other payee on time or with correct info, a penalty of $50 per statement may be imposed, up to a maximum of $100,000

No lower maximums for small businessWillful failures bring higher penaltiesNo “de minimis” exceptionNo penalty for inconsequential errorsNo penalty for errors due to reasonable causeFraud brings criminal & civil penalties

8.14 Electronic Reporting Requirements

Employers that file 250 or more Forms W-2 , Copy A must file them electronically

Same applies to 1099 filing250-threshold applies to each type of form

separately, not in totalSSA no longer accepts mag media for Form W-2

filingForms W-2c, effective in 2007, IRS requires file

250 or more during a calendar year to be filed electronically with the SSA, only applies to Forms W-2 corrected for the immediate prior year


Electronic wage reporting over the Internet Electronic Forms W-2 are filed over the Internet

through the SSA’s Business Services Online (BSO) Can be used to file Forms W-2 from the third week of

December through the end of the filing season (March 31)

Employers can fill in and submit W-2s/W-3s and W-2cs/W-3sc online This encourages small employers to submit online

without incurring programming costs Electronic Forms 1099 are filed with the IRS through

the Filing Information Returns Electronically (FIRE) system at http://fire.irs.gov

http://fire.irs.gov/


Employment tax e-file system for Forms 940, 941 & 944 Allows electronic return originators (EROs) to offer

their clients electronic employment tax filing Features: Filing options, flexible filing, explicit error conditions,

instant acknowledgements, integrated payment option, electronic signature process

Who can participate? EROs, Reporting agents, third party transmitters,

software developers, online filing providers

8.15 Reporting “Special Wage Payments” to the SSA

Special Wage Payments refer to payments made by an employer to an employee or a former employee that the employee earned in a prior year These payments significantly impact retired

employees unless the SSA is notified about such payments; benefits can be reduced when the annual earnings test is applied

However, wages or payments received in one year but earned in a previous year are not counted under the “annual earnings test”


Examples of special wage payments Bonuses Accumulated vacation or sick pay Severance pay Back pay Standby pay Sales commissions Stock options Payments on account of retirement, or deferred

compensation reported on a Form W-2 for one year but earned in a prior year


Reporting requirements: Guidance for reporting special wage payments can be

found in IRS Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration

Can report electronically through SSA’s BSO or via magnetic media

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Chapter 8

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