W 2: What Is This IRS Form?

IRS Form W-2 serves as a summary of an employee's earnings and tax withholdings for a specific tax year. It includes essential tax information such as wages, tips, bonuses, and other compensation, as well as details on federal income tax, state, and local taxes withheld, Social Security and Medicare contributions, and retirement plan contributions such as 401(k) plans. The form may also contain entries in box 12 and box 14, which can include deferred compensation, dependent care benefits, and amounts subject to social security.

Mistakes on W-2 forms can be a headache for any HR manager, but understanding how to address these errors efficiently can mitigate potential penalties and ensure compliance with IRS regulations. Here’s a breakdown of key considerations and steps for handling W-2 corrections.

Importance of IRS Form W-2

IRS Form W-2 is significant for several reasons:

• Tax Reporting: Provides employees with the information they need to file their federal and state income tax returns accurately.
• Tax Withholding Verification: Verifies the accuracy of tax withholdings throughout the year and ensures employees have paid the correct amount of taxes.
• Social Security and Medicare Records: Helps employees track their earnings for Social Security and Medicare benefit eligibility and calculation purposes.
• IRS Compliance: Ensures compliance with IRS regulations regarding the reporting of employee wages and tax withholdings, avoiding penalties and fines for non-compliance.

Do I Need to Provide a W-2 Form to My Employees Working Abroad?

For American companies employing U.S. citizens and Green Card holders overseas, it is essential to determine whether you need to issue a W-2 form. All American citizens and Green Card holders, regardless of their residence, must file a U.S. federal tax return annually. This requirement persists even if they are subject to foreign tax obligations or benefit from tax treaties.

W-2 Form Requirements for Employers:

• Employment Type: A W-2 form is necessary if the individual is directly employed by your company, rather than working as an independent contractor.
• Location of the Company Office: A W-2 is required for employees working for a U.S.-based office of the company. Employees of overseas branches or subsidiaries registered in other countries do not generally require a W-2, as these entities are considered foreign employers.

If your American employees based overseas meet these criteria—direct employment by a U.S.-based office—they must be issued a W-2 form. Employees working for multiple U.S.-based companies should receive a W-2 from each employer.

In a nutshell, whether a W-2 form is required depends on the employee’s contractual status and the location of the company’s office they are working for, underscoring Playroll's expertise in assisting companies with global employment compliance and payroll intricacies.

Preparing The W2 Form

To prepare IRS Form W-2, employers must:

1. Collect Employee Information: Gather accurate information for each employee, including their name, Social Security number, address, and total earnings for the tax year.
2. Calculate Tax Withholdings: Calculate the total amount of federal, state, and other taxes withheld from each employee's paychecks throughout the year, including income tax, Social Security tax, and Medicare tax.
3. Complete Form W-2: Fill out IRS Form W-2 accurately, entering the required information for each employee, including wages, tips, taxable benefits, and tax withholdings in the appropriate boxes.
4. Verify Accuracy: Review Form W-2 carefully to ensure accuracy and resolve any discrepancies or errors before distributing it to employees and filing it with the IRS.

Distributing IRS Form W-2

Employers must distribute W2 tax forms to employees by January 31st of the following tax year. Employees should receive their W-2 forms either electronically (with consent) or via mail to their last known address. Employers are also required to file copies of Form W-2 with the Social Security Administration (SSA) and relevant state tax agencies by the same deadline.

Key Deadlines and Penalties

• 30-Day Window: Corrections made within this period incur a lower penalty rate. If the corrected form is submitted more than 30 days after the due date but before August 1, the penalty increases to $110 per form.
• Post-August 1: Corrections made after this date can incur penalties of up to $280 per form, showcasing the importance of early detection and correction of errors.

Don't Get It Wrong! Impact of W-2 Errors

Even seemingly minor errors on W-2 forms, such as incorrect employee names or slightly inaccurate wage amounts, need prompt attention. The IRS imposes strict penalties that escalate depending on how late the corrections are made. For instance, the initial penalty for an incorrect W-2 form filed for 2021 is $50 per return, provided the corrected return is filed within 30 days of the due date, with maximum penalties increasing to significant amounts if the delay extends.

Steps for Correcting Errors

1. Determine the Error Type: If the error involves overwithholding or underwithholding of Social Security or Medicare taxes, immediate correction is necessary, including refunds of any overage to the employee or collection of underpayments.
2. Income Tax Withholding: Corrections for income tax withholdings are not possible once taxes have been deposited. Employees must adjust shortfalls or refunds through their personal tax returns.
3. Updating Employee Information: Corrections must be made if there are errors in the employee's name or Social Security number. Incorrect addresses, however, do not generally require a W-2 correction.

Procedure for Filing Corrections

• Before SSA Submission: If errors are caught before submitting the forms to the Social Security Administration (SSA), you can simply void the incorrect form and prepare a new W-2 with the correct information.
• After SSA Submission: Use Form W-2c, Corrected Wage and Tax Statement, for corrections after the forms have been submitted. Remember to file a Form W-3c with each W-2c submission.

Penalty Relief Options

• De Minimis Error Safe Harbor: Small inaccuracies, such as incorrect dollar amounts not exceeding $100, may not require correction under this safe harbor. However, the threshold for tax amount errors is $25.
• Inconsequential Errors: The IRS will not penalize for errors that do not hinder processing the form, although corrections are necessary for significant information like taxpayer identification numbers or monetary amounts.

Electronic Filing of Corrections

Filing corrections electronically can streamline the process. The SSA's Business Services Online website offers tools for creating and filing W-2c forms, providing a more efficient alternative to paper submissions.

Compliance and Reporting

Employers must comply with IRS regulations and reporting requirements related to IRS Form W-2, including:

• Accuracy and Timeliness: Ensuring Form W-2 is prepared accurately and distributed to employees on time, with copies filed with the IRS and SSA by the deadline.
• Data Security: Safeguarding employee information and ensuring compliance with data privacy laws and regulations when transmitting and storing Form W-2 data.
• Recordkeeping: Retaining copies of W2 Formand supporting documentation for at least four years after the filing deadline, as required by the IRS for potential audits or inquiries.

Don't Overpay Your Taxes

‍Once you use your Form W-2 to complete your lasttax return, if your refund is larger than expected, you can fill out a new Form W-4, Employee's Withholding Certificate. Adjusting your W-4 can result in fewer taxes taken from each paycheck, giving you an instant raise. Complete a "paycheck checkup" using the IRS's Tax Withholding Estimator to determine if you're overpaying your taxes. If you have a more complex tax situation you may need to use IRS Publication 505, Tax Withholding and Estimated Tax.

IRS Form W-2 FAQs

What information is included on IRS Form W-2?

IRS Form W-2 includes details such as employee wages, tips, bonuses, tax withholdings (federal, state, and local), Social Security and Medicare contributions, retirement plan contributions, and other compensation.

What is the deadline for distributing IRS Form W-2 to employees?

Employers must distribute IRS Form W-2 to employees by January 31st of the following tax year. If January 31st falls on a weekend or holiday, the deadline is the next business day.

Can employers distribute IRS Form W-2 electronically?

Yes, employers can distribute IRS Form W-2 to employees electronically with their consent. However, employers must comply with IRS guidelines for electronic delivery, including obtaining valid consent from employees and providing access to Form W-2 in a secure manner.