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DEPOSITING AND REPORTING WITHHELD TAX Chapter 8 1.

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1 DEPOSITING AND REPORTING WITHHELD TAX Chapter 8 1

2 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 2

3 8.1 Employer Identification Numbers Mergers, consolidations & reincorporation Proper 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 3

4 8.2 Depositing Withheld Income & Employment Taxes Taxes are not necessarily paid when filing a return Must deposit the taxes per the IRS’ assigned frequency  Payroll Tax Deposit Rules  Based on the look back period Example 1: For calendar year 2015 the look back period is July 1, 2013 to June 30, 2014  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 4

5 2014 Look back Period 2015 Look back Period 3rd qtr $12,000 4th qtr $12,000 1st qtr $12,000 2nd qtr $12,000 $48,000 Total employment tax liability $48,000 < $50,000 = Monthly Depositor 3rd qtr $13,000 4th qtr $13,000 1st qtr $13,000 2nd qtr $13,000 $52,000 Total employment tax liability $52,000 > $50,000 = Semi-Weekly Depositor 8.2 Depositing Withheld Income & Employment Taxes 5

6 Nonpayroll withholding treated separately Employers 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

7 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 8.2 Depositing Withheld Income & Employment Taxes 7

8 New Employers Classified 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 Employers Successor 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. 8

9 8.2 Depositing Withheld Income & Employment Taxes 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 9

10 8.2 Depositing Withheld Income & Employment Taxes Must be paid by The 15 th of the following month Monthly Deposit Requirements Accumulated tax liability for the calendar month 10

11 8.2 Depositing Withheld Income & Employment Taxes Must be paid by The following Wednesday Semiweekly Deposit Requirements Wages paid on Wednesday, Thursday & Friday Must be paid by The following Friday Semiweekly Deposit Requirements Wages paid on Saturday, Sunday, Monday & Tuesday 11

12 8.2 Depositing Withheld Income & Employment Taxes Must be paid by The close of the next business day One-day deposit rule Accumulated tax liability reaches $100,000 on any day during a deposit period 12

13 8.2 Depositing Withheld Income & Employment Taxes One – day Deposit Rule If 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. 13

14 8.2 Depositing Withheld Income & Employment Taxes Quarterly “de minimis” deposit rule Accumulated 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. 14

15 8.2 Depositing Withheld Income & Employment Taxes 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 944 Not held to the monthly or semiweekly depositor statuses If 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 15

16 8.2 Depositing Withheld Income & Employment Taxes 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 16

17 8.2 Depositing Withheld Income & Employment Taxes Shortfall rule IRS 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 17

18 8.2 Depositing Withheld Income & Employment Taxes 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 18

19 8.2 Depositing Withheld Income & Employment Taxes 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

20 8.2 Depositing Withheld Income & Employment Taxes EFTPS requirements EFTPS is a must for all deposititory taxes  Once an employer becomes subject to the EFT requirement, it applies to all federal taxes the employer is required to deposit under IRC Section 6302 Employers that are required to deposit electronically must use EFTPS Enrollment: New business taxpayers are pre-enrolled Newly required taxpayers enroll with Form 9779, Business Enrollment form for EFTPS or online at Enrollment verifies company info & notifies the IRS of the deposit method selected  EFTPS-Direct (ACH Debit)  EFTPS-Through a Financial Institution (ACH Credit) 20

21 8.2 Depositing Withheld Income & Employment Taxes 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 21

22 8.2 Depositing Withheld Income & Employment Taxes Employer Relief IRS 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 22

23 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. 8.2 Depositing Withheld Income & Employment Taxes 23

24 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 8.2 Depositing Withheld Income & Employment Taxes 24

25 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 8.2 Depositing Withheld Income & Employment Taxes 25

26 IRS can … and WILL … apply a 100% penalty for not withholding and paying taxes Known 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 8.2 Depositing Withheld Income & Employment Taxes 26

27 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 8.2 Depositing Withheld Income & Employment Taxes 27

28 8.3 Form 941 Who 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

29 8.3 Form 941 Who 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 29

30 8.3 Form 941 Completing 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 30

31 8.3 Form 941 Completing the Form 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 31

32 8.3 Form 941 Completing the Form 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 32

33 8.3 Form 941 Completing the Form 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 33

34 8.3 Form 941 Completing the Form 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 34

35 8.3 Form 941 Completing the Form 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 35

36 8.3 Form 941 Completing the Form Alternative signature methods  1998 – IRS Restructuring and Reform Act – Electronic signatures  2005 – Facsimile signatures allowed  This procedure is primarily a convenience for payroll service providers New 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 36

37 8.3 Form 941 Completing 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 37

38 8.3 Form 941 Completing the Form Special procedures for corrections in same-sex marriage cases  In September 2013, the IRS provided special administrative procedures for adjustments and claims for refund or credit for overpayments of employment taxes attributable to same-sex spouse benefits in the first 3 quarters of 2013  Under the first alternative, an employer had to repay or reimburse its employees for the amount of over-collected FICA and Federal tax for the first 3 quarters on or before December 31, 2013  Under the second alternative, an employer that didn’t repay or reimburse employees for the amount withheld in FICA or Federal tax would need to file a Form 941-X to correct overpayments of these taxes. 38

39 8.3 Form 941 Completing the Form 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 39

40 8.3 Form 941 Completing the Form 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) 40

41 8.3 Form 941 Completing the Form 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 41

42 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 941 Completing the Form 42

43 8.3 Form 941 When & Where to File Form 941 FORM 941 FILING DEADLINES QUARTERQUARTER ENDS 941 DUE DATEAUTOMATIC EXTENSION JAN – MARMARCH 31APRIL 30MAY 10 APR – JUNEJUNE 30JULY 31AUGUST 10 JULY – SEPTSEPTEMBER 30OCTOBER 31NOVEMBER 10 OCT – DECDECEMBER 31JANUARY 31FEBRUARY 10 If the Form 941 due date falls on a Saturday, Sunday or legal FEDERAL holiday, the due date becomes the next business day. 43

44 8.3 Form 941 Completing the Form 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 44

45 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 Form 941 Completing the Form 45

46 8.3 Schedule B (Form 941) Filed by:  Semiweekly depositors  Monthly depositors that accumulate at least $100,000 in employment tax liability during a month Records 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 46

47 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. 47

48 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) 48

49 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 IRS Advise on Avoiding Form 941 Errors 49

50 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-3 Form 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 50

51 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 tax Third party can be designated 51

52 8.3 Form 945 When & where to file Form 945?  Due on January 31 st of the following year  Extension to February 10 th if all deposits are made timely throughout the year  Mailing address is provided in the Form 945 instructions 52

53 8.3 Form 941-M Monthly reporting for Delinquent Employers o 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

54 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 54

55 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 $1,900 per year for 2014  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 $1,900 threshold is met 55

56 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 liability When & where to file?  Due date is January 31 of the following year 56

57 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 burden 2008 – Employers were notified by the IRS if they were eligible for the program  Required to file Form 944 until they were no longer eligible 2009 – IRS changed the rules to make EAFTP voluntary Annual employment liability of $1,000 or less qualifies employers for eligibility 57

58 8.5 Form 944 – Annual Reporting by Small Employers 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 2014, 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 58

59 8.5 Form 944 – Annual Reporting by Small Employers 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 59

60 8.5 Form 944 – Annual Reporting by Small 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 time Correcting 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 60

61 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 61

62 8.6 Making Corrections / Adjustments 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 62

63 8.6 Making Corrections / Adjustments 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 63

64 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 64

65 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 65

66 8.7 Penalties for Late Reporting and Paying Tax 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 66

67 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 67

68 8.8 Information Reporting for Employees 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 68

69 8.8 Information Reporting for Employees 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 69

70 8.8 Information Reporting for Employees 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 70

71 8.8 Information Reporting for Employees 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 71

72 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 72

73 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-2 Copy 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 73

74 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 74

75 8.11 The Reconciliation Process for Employers 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 75

76 8.12 Information Returns for 1099 Seri es 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 76

77 8.12 Information Returns for 1099 Seri es 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 77

78 8.12 Information Returns for 1099 Seri es 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, “1 st 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. 78

79 8.12 Information Returns for 1099 Seri es 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 79

80 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 80

81 8.13 Penalties for Incorrect or Late Information Statements Failure to provide Forms W-2 to employees  $30 per statement if the failure to provide a complete and correct statement is corrected within 30 days after the due date, with a maximum penalty of $250,000 a year ($75,000 for small business)  $60 per statement if the failure to provide a complete and correct statement is corrected more than 30 days after the due date but by August 1 of the same year the statement is due, with a maximum penalty of $500,000 a year ($200,000 for small businesses)  $100 per statement if the failure to provide a complete and correct statement is not corrected by August 1, with a maximum penalty of $1,500,000 ($500,000 for small businesses) 81

82 8.14 Electronic Reporting Requirements Employers that file 250 or more Forms W-2, Copy A must file them electronically Same applies to 1099 filing 250-threshold applies to each type of form separately, not in total SSA no longer accepts mag media for Form W-2 filing Forms 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 82

83 8.14 Electronic Reporting Requirements 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 83

84 8.14 Electronic Reporting Requirements 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 84

85 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” 85

86 8.15 Reporting “Special Wage Payments” to the SSA 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 86

87 8.15 Reporting “Special Wage Payments” to the SSA 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 Business Services Online (BSO)  A paper listing can be used to report special wage payments made to several employees. The format for submission is in Publication

88 Questions 88


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