As a small business owner, you have to take extra care when filing your taxes. Not only do you have personal and business taxes to account for, but if people work for you, you also have to deal with taxes related to their employment. The W-2 form is one obligation you must fulfill. This document provides employees and the Internal Revenue Service (IRS) with details regarding workers’ income and tax contributions.
As an employer, you are required to send an IRS Form W-2, Wage and Tax Statement, to each of your employees. The thought of adding yet another piece of paperwork to your to-do pile as a business owner may be daunting at first. However, it’s critical to meet your W-2 reporting obligations, or you risk not complying with the tax authorities. You don’t want to get into hot water with the IRS, or you risk a possible audit and, if issues arise, fines and other legal repercussions.
The great news is that completing a W-2 IRS form is fairly straightforward — provided you’ve been keeping track of your invoices and other financial paperwork throughout the year. Skynova’s software products help you do just that, allowing you to process and organize payments efficiently. Below, we explain why W-2 forms are so important, how to fill one out, and how Skynova can help you get the job done fast.
What Is the W-2 Tax Form’s Purpose?
A W-2 provides accurate information about wages and salaries paid to employees and details regarding what state, federal, and local income taxes were withheld from their earnings. Employees need this tax information to ensure they accurately complete their annual income tax returns. The IRS and Social Security Administration (SSA — the body responsible for overseeing Social Security taxes) can use their copy of the W-2 to verify a person’s income tax return.
A W-2 includes the following information:
- The total taxable pay the employee received for the year, including compensation, wages, and tips
- Any Social Security and medical pay given
- The amount of federal income taxes, Medicare wages, and Social Security wages withheld
- Any state taxable pay and state taxes withheld
- Any other details regarding taxable benefits the employee received
You must provide a W-2 to every person you paid a salary or taxable wage to in the relevant tax year. The threshold is $600, meaning that if you paid an employee $600 in wages, salary, or cash equivalents (like taxable benefits), you must complete a W-2 for that employee. Further, you must provide a W-2 for any employee who you withheld income taxes, Social Security taxes, or Medicare from. So, if the employee made less than $600, but taxes were withheld, for example, for Medicare or Social Security, you must still complete the W-2 form.
Note that a W-2 is only required for actual employees who receive salaries or wages. Independent contractors and self-employed workers require other types of tax paperwork. If you aren’t sure whether the people you hire are employees or independent contractors, the IRS has guidelines to help.
Filing a W-2 Amendment
A W-2 form is a critical piece of tax paperwork for both the employer and the employee. In case of errors, it may be necessary to amend a W-2 form and/or amend an individual tax filing based on a W-2 form. Luckily, you can address this, even if you’ve already filed the paperwork. While you can’t go back and change the original document, you can file an amendment.
In case you need to make changes to an employee’s W-2, you have to take a few key steps:
- Correct the error on the form itself using Form W-2 C.
- Provide the corrected Form W-2 C to the affected employee.
- The updated Form W-2 C must be filed with the IRS and the SSA.
While it’s not the end of the world if you make an error on a W-2 form and need to change it, this will add an extra administrative burden to your business. The below guidelines can help you get it right the first time, saving you time and stress. Read on to find out how to complete a W-2 form step by step.
What Is Included on a W-2 Form?
The W-2 includes all the relevant information that employees require to file their own income taxes. It also provides all the information the IRS needs to verify an individual’s tax statements. All W-2 forms will contain the same basic information for you, the employer, to complete, regardless of your industry.
The paperwork is divided into two main sections. One provides state-relevant tax details, and the other provides federal details. This is because employees must file taxes at both the federal and state levels. Here’s a breakdown of what the form includes.
The first point to complete on the W-2 form is your business information. You will have to provide the employer’s name (your business name), address, employer identification number (EIN), and the state tax ID number. If you aren’t sure what the employer’s state ID number is, check with your state’s Department of Revenue. Here is a comprehensive list of all the different state websites with links, so you can easily find yours.
If you are a new business and don’t yet have an employer ID number (employer identification number), you can get one from the IRS. Apply online to get it immediately at no cost. An EIN is basically like a Social Security number but for employers. It’s simply a unique identification number you provide on all tax paperwork you file and helps keep your paperwork organized.
Next, you will have to add the relevant employee’s information on the W-2 form. This includes the employee’s name, home address, and Social Security number (SSN). This is the critical identifying information that you should obtain from every employee before they start working for you. Make sure to include the full legal name as it appears on their official identification, like a driver’s license.
The SSN is the unique control number used by federal agencies, like the IRS and the SSA, to differentiate between individuals in their system. Each of your employees should have a Social Security card. As an employer, you can request employees to present a copy of their Social Security card for your records. This is best practice, helping to prevent errors and payroll mismatches.
The next part of the form is a bit more complicated. You will have to specify the employee’s total wages and salary for that tax year and any taxes that were withheld. First, total the employee’s wages and salary, including income from tip income and other compensation. You should have a record of all payments made via pay slips that you can easily refer to for a total amount.
Any past pay slip information provided should also include details about withheld Social Security taxes, Medicare taxes, and other withholdings, such as a state or city tax. When the employee first started working for you, you should have determined how much to withhold based on IRS Form W-4. Employees use this to indicate their tax situation and tell the employer what they should withhold based on the employee’s personal details, like marital status and dependents.
Retirement Plan Information
Every W-2 further includes a section for retirement and life insurance compensation plan details. Some employers offer a retirement plan in their business. For example, they may offer their own company retirement plan that employees can pay into. Alternatively, they may agree to match employee contributions to a retirement plan like a 401(k) with employer contributions. Roth contributions are another option.
In this section, you must also indicate whether the person is a statutory employee. A statutory employee is one whose earnings are not subject to federal income tax withholdings but are subject to Medicare and Social Security taxes. You must also indicate whether the employee received any sick pay via the third-party insurance provider you have lined up for this purpose.
Finally, you must note whether the employee received any dependent care benefits. These are benefits provided by an employee to care for their dependents, such as disabled family members or children. Examples of such benefits could include paid leave, tax credits, and flexible spending accounts. In some cases, the cost of employer-provided dependent care benefits can add up to thousands of dollars, so it’s important to track these.
Health Care Information
Under the Affordable Care Act (ACA), employers must also report the cost of an employer-sponsored group health plan on an employee’s W-2. You might provide a corporate health coverage plan, for example, or perks like a health savings account (HSA). Including this information is also in your interest, as the employer, because it may result in tax breaks. For more details on which employers must provide information on coverage, check out the IRS website.
When Should Forms W-2 Be Given to Employees?
You should prepare six copies of each Form W-2 per employee. Sounds like a lot, right? Don’t worry: The different copies are labeled according to which individual or organization they must be submitted to. Here’s a breakdown of who gets what and what the deadline is for each:
- Copy A goes to the SSA. This must be received by Feb. 28 of the year following the relevant tax year. This must be accompanied by Form W-3.
- Copy 1 goes to the relevant local wage, city, or state income tax department. Check with your local authorities on what the deadline is and where to submit the documentation.
- Copy D stays with the employer. You should hang on to all tax paperwork for personal business clarity and in case of future IRS audits.
- Finally, three copies to go to the employee. The employee uses Copy B for their federal income taxes, Copy 2 for their local, city, or state wages tax, and Copy C for their records. Employees need their paperwork by Jan. 31 of the year following the relevant tax year.
So, say you are filing tax paperwork for the tax year 2020. That means that you have to submit all employee W-2s to the SSA by Feb. 28, 2021. All employee W-2s need to be received by employees by Jan. 31, 2021.
When Are W-2 Forms Due to the IRS?
The W-2 form is due by Jan. 31 of the year after the relevant tax year. So, a W-2 for 2020 must be sent by Jan. 31, 2021. It is possible to get a 30-day extension for filing a W-2 form with the SSA. You must complete Form 8809 to get this extension approved. You can send it via the address on the form or via the IRS FIRE system. If you don’t already have an IRS FIRE account, you can create one online.
While you can extend the deadline for submitting W-2 documents to the IRS and the SSA, you cannot get an extension when sending the W-2 to your employees. This is because they need the information on this form to complete their tax paperwork. Failing to provide employees with their W-2 on time not only inconveniences them, but it can also result in erroneous tax paperwork — and raise red flags with the IRS.
Manage Your Tax Forms and Accounting With Skynova
If you keep track of your taxpayer paperwork throughout the year, completing your employees’ W-2 forms will be a streamlined and simple process. Skynova offers multiple software products to help you stay on top of your finances. Purchase order and invoice templates help make billing and payments faster, for example. These are just a few of the business templates you can access via the Skynova system.
Find out how we can help support your business operations and day-to-day success, not only during tax season but also year-round.