W2-c’s - The Ins and outs and uh-ohs! Part 2
By Dina Rand, Senior Payroll Tax Consultant, Spencer Thomas Group
Any of the things we reviewed in part 1 last month can be the issue, if not caught during your reviews. Once the W-2s are finally out the door, promptly make and file any needed corrections to ensure employees have the proper information for their personal income tax returns, which they must file with the IRS by the April 2017 deadline.
When preparing your 4th quarter 941 and balancing the 4 quarters to your W-2 totals, you may find differences between the 941 Total and the W-3 will require adjustment. The type of adjustment needed is determined by the cause of the difference. Sometimes, the 941 or the W-2/W-3 has not yet been filed so it can be adjusted. Other times, a 941c or W-2c/W-3c is required. Examples of situations that might require adjustment include:
- payments to independent contractors were included on the 941 in error
- information on current year sick pay paid by a 3rd party payer is received after the final 941 of the year is filed but before the W-2s are filed
- the special accounting rule was used for certain fringe benefits paid in November and December, but the amounts were mistakenly included in current year income
Timing - When did the information come in? When did the employee receive the compensation and was it cash or non-cash? Is this late information or a need to correct incorrect information? These are important questions to determine if I need to do a W-2c or re-run the W-2s. If your information is given to you in time to update the current system then you can re-run W-2s. This works if you have not given your employee is their W-2. If you have given W-2s out and it is before you file with SSA, you can still re-run W-2 and swap out the W-2, note REISSUED at the top of form (hopefully the employee has not filed their 1040 return). Of course, if you have information after January 31st, then you are looking at W-2cs. Remember your reporting to SSA is now due the same time as providing y W-2s to your employees.
Determine what needs to be corrected. It is not just your Form W-2. A list of some of the returns and forms to review and are necessary are: 941, 940, State and Local returns, SUTA, W-2 and W-3. Which pay needs to be corrected and what month, quarter through year-to-date corrections need to be made. Is the income correction needed a pre-tax or after-tax adjustment?
Remember that after year-end the adjustment increases taxable wages, there is no cash net to take the taxes from. The wages are then imputed income. A decision is needed to determine how you are going to deal with the taxes owed to the jurisdictions. You can make the determination to Gross-up and pay taxes on behalf of the employee or you can pay the taxes for the employee.
- If you are grossing up for the taxes, you are paying the tax owed by the employee on their behalf. The tax which is grossed up is then taxable income to the employee. The IRS has provided a formula to avoid the pyramid effect of grossing up on the gross-up. At a minimum FICA – OASDI & HI Taxes or all of your taxes the employee has in their master tax set-up. Watch out for limitations met or that will be met with the adjustment.
o Note: I correcting shortages/overages you do not adjust the Federal withholding and /or Medicare Surtax withholding on the W-2C.
- If you pay the taxes for the employees and have the employee pay back through payroll deduction you do not have to Gross-up. If the employee pays back the taxes paid by the ER for the EE by April 15th, then there is not GU needed. If the employee does not pay it back (I would say by April 1st so you can process the new W-2C), you will need to grossed-up the delta between the amount of taxes the EE paid the company back and what is still outstanding. That needs to be Grossed Up and imputed income added to the W-2. Again, you can gross up for FICA’s only.
Is the employer going to compensate the employee for tax preparation and costs incurred as a result of receiving a W-2C? It is not required by the IRS but if the employer decides to reimburse the employee for their expenses (tax preparation fees), just note these are considered taxable wages to the employee in the year when the reimbursement was made.
We are all familiar with IRS Form 941 Employer's Quarterly Federal Tax Return. This is the employer’s quarterly federal tax return filed each quarter by employers, reporting on income taxes withheld from employee pay, FICA taxes (Social Security and Medicare taxes) withheld from employees, and FICA taxes payable by the employer. The 4 quarters of the Form 941 is used when balancing on Form W-3 (total of all Forms W-2). When you have an error or that you find missing compensation which needs to be reported/recorded on the W-2s, the employer will complete a W-2C as well as file a IRS Form 941X. The IRS requires businesses to report errors on Form 941X - Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Form 941X relates line-by-line with Form 941. Form 941X is a stand-alone form. You can file Form 941X at any time when you discover an error, rather than having to wait to file it at the end of the quarter with the next employment tax return. The correction should only affect 4th Quarter, if balancing is done on a regular basis and no unforeseen payments were made to other quarters.
When filling out the Form W-2c only report what is being corrected. Do not report wages and/or taxes if they are not being corrected. If you are only correcting the employee’s SSN then that is what is reported, do not include all the wages and taxes from the original W-2. If you are only correcting State Wages, then only State Wages are reported and no taxes.
Year-end can be daunting, yes, but it can be manageable. When you do your due diligence regularly, balance, fix errors immediately, document, run periodic reviews during the year and if throughout the year you collect information for year-end instead of trying to obtain all of the information in December, doing this will help smooth out the year-end processing W-2. This will relieve year-end stress in your payroll as well as other departments at year-end, as well as fewer W-2cs.
To help the payroll department in informing employees on what lies ahead for the upcoming year, send out a year-end memo to your employees, this will help curtail questions during this hectic payroll time period.
Learn from your past, create best practices for your company and your year-end will improved.
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