It’s the last week of January. You know what that means. Sub-zero temperatures in the Midwest? Super Bowl party preparations? Bubble Wrap Appreciation Day?
Yes, yes, and, umm, I guess so? But the end of January also means the clock is ticking on getting Form W-2 statements out to employees. If you haven’t gotten your forms printed and sent, don’t worry; you’ve still got time. But you’ll definitely want to get a move on.
Here’s what you need to know about all things W-2:
1. The deadline for getting W-2’s to employees is January 31st.
January 31st is the date by which you need to have distributed W-2’s to employees. Employees don’t technically have to have W-2’s in hand, but at minimum the envelope must bear an official January 31st or earlier postmark. W-2’s can also be electronically distributed. Bear in mind, though, employees legally have the right to request a paper copy, should they so desire.
While January 31st is the deadline for distributing W-2’s to employees, it’s not the actual filing deadline. Employers must file their W-2 and W-3’s by either February 28th (paper returns) or March 31st (electronic filing).
2. There are multiple methods for creating employee W-2’s.
If you want to go the old-school route, you can order W-2 forms directly from the IRS here and manually compile them. If you’re going this way, you’ll want to check out the official IRS “General Instructions for Forms W-2 and W-3” to ensure you are accurately assembling the info.
Another option is to use your payroll records to create W-2 forms via the “Business Services Online” tools from the Social Security Administration. Not only does the Business Services Online tool allow for form creation, but it also supports the complete electronic filing process.
The path of least resistance for creating W-2 forms, though, is via payroll software. W-2 form creation is a fundamental capability within any reputable business payroll software. It allows for almost complete automation and eliminates the majority of opportunities for manual errors. This 3 step process for creating W-2 forms in Dynamics GP, for example, is typical of the ease of using accounting or specialized payroll software to print W-2 forms.
3. How you classify W-2 and 1099 workers matters.
The distinction between a W-2 employee and 1099 contractor can get a bit, well, grey. But there is a difference. In fact, it’s one that employers are legally required to accurately distinguish.
The employment website TenTilTwo.com recently answered the question of what makes for a W-2 employee versus a 1099 contractor this way:
“The answer here is as simple as two little words. A Duck. If it walks like a duck and quacks like a duck, it’s a duck. In other words, if the position requires the employee to be directed as to how, when, where and with what to do the job, then get quacking… he is a W-2 employee. If however, the job will be done independently, then a 1099 may be the way to go.”
For 95% of scenarios, this considerably simplified standard should adequately settle the debate. If you’ve got a case you’re not sure about though, you can check out the IRS’s 20 factor test for determining “worker classification.” If you’re still not sure, it’s not a bad occasion to reach out to a pro—either your CPA or tax attorney—for advice that can save you some legal headaches (more on that in a moment).
What’s the significance of 1099 versus W-2? Being able to legitimately utilize a 1099 classification provides a number of benefits to employers. Aside from eliminating any tax responsibility on the wages, a 1099 classification gets the employer off the hook for a number of compliance issues related to non-discrimination, benefits, and wage protection laws. If you are sending out 1099’s—just like their cousin W-2’s, you’ll need to have those printed and sent by January 31st.
4. The government isn’t particularly fond of W-2 shenanigans.
The bottomline is that W-2 mistakes—whether they’re intentional or not—are trouble.
Let’s start with the worker classification issue we just talked about. If you’re thinking about pushing the envelope on a employee/contractor classification decision in order to avoid Obamacare implications or for any other reason, you’ll want to think twice. Last year, the government audited 6,000 companies specifically as part of a campaign to crackdown on the practice. At the time, FoxBusiness.com reported President Obama’s estimation that the crackdown would lead to an additional $7B in revenue. While tax audits are actually down—CNN.com reported a 5% drop to 1,500,000 audits last year—they’re still common. The fact is, a disproportionate number of 1099’s can be an audit attracting red flag.
There is good news, though, even if you’ve previously made some questionable worker classification decisions. The IRS now offers a voluntary reclassification program that can help you settle up and retroactively convert 1099 employees to a W-2 status.
Provided you’ve correctly classified workers and you’ve properly maintained your payroll records, steering clear of IRS penalties is relatively straightforward. It really requires just accuracy and timeliness.
The specific penalties for being late or inaccurate with W-2’s are fully documented in the “General Instructions for Forms W-2 and W-3.” But to get you up to speed, there’s a few things worth generally being aware of.
First, penalty amounts depend on a few factors, including:
- How late you were (for deadline related issues),
- Whether or not the IRS thinks the mistakes were intentional (for accuracy infractions), and
- The size of your business.
Second, the IRS does name exact dollar amounts for specific infractions. Penalties can range from $30 to $250 per W-2. For example, here’s how the IRS spells out the penalty for what they call “Intentional disregard of payee statement requirements:”
“If any failure to provide a correct payee statement (Form W-2) to an employee is due to intentional disregard of the requirements to furnish a correct payee statement, the penalty is $250 per Form W-2 with no maximum penalty.”
Finally, employers should be aware that there’s no protection in pointing the finger at 3rd party filers:
“Use of a reporting agent or other third-party payroll service provider does not relieve an employer of the responsibility to ensure that Forms W-2 are furnished to employees and that Forms W-2 and W-3 are filed with the SSA, correctly and on time.”
Meeting the deadline
With just a couple days left, if you still need to get your forms out, here’s a quick run-down of some go-to resources:
- IRS.gov: “General Instructions for Forms W-2 and W-3”
- SSA.gov: “Business Services Online”
- IRS.gov: “Tax Law Questions”
- Inc.com: “File Those W-2’s and 1099s and Keep the IRS off Your Back”
- About.com: “Understanding Form W-2, Wage and Tax Statement”
- AccountantsWorld.com: “Directory of Accounting Professionals”