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September, 2019

How to Avoid W-2 Errors

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How to Avoid W-2 Errors

Mistakes happen to the best of us. When a mistake happens on an employee’s Form W-2, it’s important to correct it immediately and avoid any potential fines. But wouldn’t it be even better to avoid W-2 errors altogether? Let’s discuss the top ten most common Form W-2 errors and how to avoid them.

1. Excess Contributions to HSA

If excess contributions are made to an employee’s Health Savings Account (HSA) that exceed the 2019 maximum annual contribution amount of $3,500 for self-only coverage or $7,000 for family coverage, the employer may correct this one of the following ways:

  1. The employer requests a return of excess funds from the financial institution and these amounts are refunded to the employee. The employer then issues a Form W-2c showing the reduction in the amount reported in box 12, Code W.
  2. The employer chooses not to recover the excess contributions and those funds must then be included as taxable wages on Form W-2, boxes 1, 3, and 5. The Social Security and Medicare tax owed on the excess amount is shown in boxes 4 and 6. If this is not properly recorded on the Form W-2, then a Form W-2c must be issued.

2. Excess Contributions to Qualified Retirement Plan

Qualified retirement plans include 401(k)s and 403(b)s. Excess contributions are not reported on a Form W-2 but on a Form 1099-R.

3. Excess Pretax Contributions to FSA

If an employee’s annual pretax contribution exceeded the 2019 FSA contribution limit of $2,700, the excess should be refunded to the employee and the amount recorded as taxable wages in Form W-2c, boxes 1, 2, and 5.

Keep in mind, the employer is liable for any Social Security and Medicare tax not withheld and must pay this amount. The employer is also responsible for any federal income tax and Additional Medicare Tax not withheld. The federal income and Additional Medicare Tax liability, less any penalties, can be abated by obtaining Form 4469 from the employee.

4. Incorrect Amount Reported in Box 12, Code DD

This is where the aggregate value of employer-sponsored health coverage is reported. A Form W-2c is required to be filled out to correct the amount in box 12, Code DD. Failure to do so can result in a penalty assessed of $270 per Form W-2.

5. Missing/Incorrect Name or SSN

Employers are required by the IRS to correct errors made in an employee’s name or Social Security number (SSN). Errors can include leaving an employee name or SSN blank or showing the SSN as “000 00 0000” or “applied for” after a valid SSN is obtained from the employee.

If any employee has changed their name due to marriage or divorce, they are required to furnish a new Form W-4. If an employee’s last name on the Form W-4 differs from what is on their Social Security card, they will need to check box 4 on the Form W-4. The method for correcting these errors depends on the circumstances:

Nature of ErrorCorrection to Form W-2cCorrection to Form W-3c
Employee name or SSN was incorrectly reported on Form W-2.Complete boxes d-i for up to the statute of limitations.Tell the employee to correct the Form W-2 attached to Form 1040.Complete boxes d-j for at least up to the statute of limitations.
Employee obtains new or reissued Social Security card.Complete boxes d-i only for the most current year.Complete boxes d-j only for the most current year.
Name and SSN were blank on Form W-2.Call the Social Security Administration for instructions.Call the Social Security Administration for instructions.

6. Incorrect Employer Name or Address

The employer’s name and address should be the same across Forms W-2, 941, 941-SS, 943, 944, CT-1 or Schedule H (Form 1040). If a change of employer address is required, a Form 8822-B should be filed. Form W-3c cannot be used to correct this type of information.

7. Incorrect Employee Address

Employees should use an address where they can receive mail if they need to be contacted by the employer or IRS. An employer has three options if the Form W-2 has an error related to the employee’s address:

  1. Furnish the employee with a corrected Form W-2 with “reissued statement” printed on it.
  2. Mail the original Form W-2 to the employee’s correct address.
  3. Complete a Form W-2c showing the correct address and all other correct information, if applicable.

8. Incorrect EIN or Tax Year

Employer Identification Number (EIN) or tax year errors on Form W-2 can create several time-consuming problems for employers, including issues with Forms 941. There is then a penalty assessed for EIN and tax year reporting errors. Correcting the EIN or tax year is a two-step process.

Step 1: Prepare Forms W-2c and W-3c with the Previously Reported Information

  • Provide the incorrect EIN in box b and/or the incorrect tax year in box c.
  • Show the money amounts originally reported in the previously reported column.
  • Show zeros in the corrected amounts column.

Step 2: Prepare Forms W-2c and W-3c with the Correct Information

  • Show zero in the money amounts of the previously reported column.
  • Show the money amounts originally reported in the corrected amounts column.
  • Make sure to give employees a copy of Forms W-2c and file Forms W-2c and W-3c with the SSA.

Are you ready for year-end processing?

Use our handy monthly year-end guide and resources to tackle year-end processing with confidence.

9. Error Withholding Federal Income Tax/Additional Medicare Tax

Corrections in the reporting of federal income tax or Additional Medicare Tax withheld on a Form W-2 is not allowed by the IRS unless it’s deemed “administrative.” If the amounts shown on Form 941 do not match with the amounts actually withheld, the error may be corrected.

The IRS does not allow for an employee to have federal income tax or Additional Medicare Tax withheld from current wages for the purpose of correcting under- or over-withholding in a previous tax year.

10. Excess Social Security/Medicare (FICA) Withholding

Employers need to be aware of the corrections process when they have a Form W-2 that shows excess FICA withholding for an employee. The IRS expects employers to complete the following when there is excess Social Security/Medicare (FICA) Withholding:

  • Refund any excess FICA withheld, so a Form W-2c should be issued displaying the correct amount of the FICA withholding amount.
  • Refund the FICA tax overpayments to the employees.
  • If the employee has not and will not claim a refund of the excess on the personal income tax return, you can file a Form 941-X requesting an adjustment or refund for the employee and employer overpayment of Social Security and Medicare.

Avoiding W-2 Errors Entirely

Year-end processing is always overwhelming and time-consuming, so the last thing you need to worry about is correcting W-2 errors. A great way to be proactive about W-2 errors is to partner with a payroll provider that offers a unified, cloud-based solution. Using a unified database is beneficial in three ways:

  1. Information is entered only once, eliminating the potential for errors.
  2. All data is synced between payroll, HR, attendance, and more so information is always accurate.
  3. A cloud-based solution provides a secure, centralized database to store and protect sensitive data.

Furthermore, check to see if your current payroll provider offers a W-2 error-checking algorithm. This can be a major timesaver, especially during year-end processing. It provides a powerful and intuitive engine that checks your W-2 information against the federal database, alerting you to potential errors before they are in your employees’ hands. A proactive approach is always better than a reactive one.

W-2 Vs. Final Pay Stub

Error Alert!

The IRS requires that employee Form W-2s and Form 1095-Cs must match what is printed on their social security cards. For example, if an employee has a hyphenated last name on their social security card but it is not hyphenated on their Form W-2 or Form 1095-C, this will be flagged as an error.

Form W-2 Penalties

The Internal Revenue Service (IRS) may impose a penalty for each Form W-2 with a missing or incorrect Social Security number or employee name. If there are errors, you would then be subject to the following penalties:

Large Businesses with Gross Receipts of More Than $5 Million

Time Returns Filed/ProvidedNot More Than 30 Days Late31 Days Late - August 1After August 1 - Not at AllIntentional Disregard
Due 1/1/2020 - 12/31/2020$50 per return or statement -
$556,500 maximum
$110 per return or statement -
$1,669,500 maximum
$270 per return or statement -
$3,339,000 maximum
$550 per return or statement -
No limitation

Small Businesses with Gross Receipts of More Than $5 Million

Time Returns Filed/ProvidedNot More Than 30 Days Late31 Days Late - August 1After August 1 - Not at AllIntentional Disregard
Due 1/1/2020 - 12/31/2020$50 per return or statement -
$194,500 maximum
$110 per return or statement -
$556,500 maximum
$270 per return or statement -
$1,113,000 maximum
$550 per return or statement -
No limitation

Bottom Line

Now is the time to address any gaps you have in your W-2 or year-end processing instead of dealing with penalties later. The right tools and resources can help you better manage your year-end tasks and avoid W-2 errors entirely. If your current payroll provider doesn’t offer tools like an error-checking algorithm for accurate W-2 processing, it may be time for something better.

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