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Payroll Taxes

Basics For Filing Employee Payroll Form W-2 for Small Businesses

December 30th, 2015

How to prepare and file W-2, W-3 and W-2C, W-3C correction forms.

A W-2 form is an employee wage and payroll tax statement showing the total earnings and taxes for an employee for the full tax year.  The employer is required to issue W-2 forms to its employees and report the information to the government at the end of the year. The employee uses the W-2 form information to prepare and file his or her individual tax return using a form such as the 1040 to get refunds or pay more taxes.

The W-2 form is basically a summary of all paychecks issued to an employee throughout the year. There are several copies (A, B, C, D, 1, 2) for a W-2 form.  Copy A is reported to the government, copies B, C & 2 are for the employees and copies D & 1 are for the employer and the State as required.

Before the end of January (1/31), an employer is required to mail or distribute the W-2s to its employees. The employer then files the W-2s and a summary W-3 form to the SSA (Social Security Administration) before 2/28. The SSA will process and forward the data to the IRS later. If the employer files the data electronically, the deadline is extended to the end of March. The W-3 form is not needed if the W-2 data is filed electronically instead of by regular mail. The W-3 form is a summary of a batch of W-2s so a company may have multiple W-3s if W-2s were filed in separate batches.

Here are a few small business payroll tips to preparing and file or e-file your W-2 forms correctly.

  • W-2 forms should always have amounts entered in boxes 1-6 for employee payroll gross earnings, federal income tax withheld (could be $0), Social Security wages, Social Security tax, Medicare wages and Medicare tax. Certain non-resident aliens and medical interns may be exempt from the FICA taxes.
  • There is an annual taxable wage maximum for Social Security tax and no limit on Medicare tax. For example, income above $118,500 for tax year 2015 is not taxable for Social Security tax. In other words, the amount in box 3 (Social Security wages) can’t be more than $118,500, regardless of the total earning in box 1. The maximum in box 4 is $7,347 (6.2%) for tax year 2015.
  • If your small business payroll involves tips (a large restaurant, e.g.), you need to understand how to report employee payroll tips correctly on the W-2.
    • Social Security taxable earnings, excluding reported tips, are reported in box 3.  Earnings from tips are reported in box 7; however, box 4 is the total Social Security tax calculated from the sum of box 3 and box 7.
    • If the reported tips are less than 8% of the gross receipts, the IRS may require the employer to allocate tips to applicable employees.  The allocated tips are reported in box 8 and are not taxable for Social Security and Medicare.  However, the employee will pay income taxes on it when filing 1040s.
  • W-2 Form Box 12 is used to report many items and their respective codes.  For example, Affordable Care Act (ACA) requires employers to report the cost of coverage for an employee group health plan using the code DD.  This amount (benefit to the employee) is not taxable at this time.  The reporting is generally required but is not mandatory to smaller businesses (<250 employees) and certain plans (Dental, Vision, COBRA, e.g.).  W-2 Form Box 12 is also used to report IRA, 401K, group term life insurances and other items that could be important to the  employee’s 1040 tax return.
  • W-2 Form Box 13, statutory employees include insurance sales agents, sales reps, etc. that are treated as employees, subject to Social Security, Medicare taxes but not federal income tax withholdings. W-2 Form Box 13 is also used to indicate retirement plans and 3rd party sick pay.
  • W-2 Form Box 14 is for misc. items like union dues, united way contributions, state disability insurance and other information that may be useful for the employees.
  • W-2 Form Boxes 15-20 are for State and local income and tax reporting.  Some States require this while others do not need the W-2 information.  For example, California collects DE9C (employee wage and tax) quarterly and does not need the yearend W2s.  Different States may have different deadlines for W-2/W-3 reporting.

How to make W-2 Form corrections. 

W-2C form is used after W-2 forms have been filed to the SSA to correct any information on the wrong W-2.  There is no deadline for W-2C form.  It is prepared and filed as needed.  W-3C is a summary of the W-2Cs that are filed in the batch.  Similarly, W-3C is not required if W-2Cs are filed electronically.

The correction form is used after the W-2 has been filed to the SSA.  It contains the previously reported wrong and the correct information for each of the data fields.  Other than the basic company and employee information, you do not need to enter any business payroll information that you are not correcting.  For example, if the original W-2 Box 1 and 2 are wrong but not box 3-6, you only need to enter the previously reported box 1 & 2 and the correct amounts for box 1 & 2.  Information is reported in pairs.

One last thing to remember is that if you prepare and file W-2C correction, you need to review and confirm the corresponding form 941s and other reports.  All small business payroll records need to reconcile and agree with one another.  The total of all employee form W2s need to equal that of the sum of the four form 941s.

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