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August, 2020

How to Avoid W-2 Form Errors

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How to Avoid W-2 Form Errors

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

Common Errors on Form W-2

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, Corrected Wage and Tax Statements, 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 reported 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.
Information

Form W-2: Box 12, Code DD Information

A common question about tax forms is, “What is Code DD on Form W-2?” Some employers are required to report the cost of an employee’s health care benefits in Box 12 on their Form W-2, using Code DD to identify the actual amount. The reported amount generally includes the portions paid by both the employer and the employee but does not include the amount of any salary reduction contributions. The amount recorded for Code DD is not taxable and is only included for information purposes.
Form W-2, Box 12, Code DD

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. If excess contributions are made, it’s the employee’s responsibility to communicate information to their trust plan administrator to make a corrective distribution plan.

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.

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. Excess Contributions to a Dependent Care Assistance FSA

In 2019, an employee could contribute up to $5,000 annually pre-tax contribution to their qualified dependent care assistance flexible spending account (FSA). If an employee’s contribution was more than $5,000, it must be included in wages subject to FIT, FITW, FICA, and FUTA. Employers must also refund the excess to the employee and the amount reflected as taxable wages in Form W-2c, boxes 1, 3, and 5. There must also be an entry in Form W-2x, box 10 reflecting the decrease for the amount refunded to the employee.

Employers are liable for any FICA taxes that were withheld, federal income tax, and Additional Medicare Tax. They are also responsible for paying the exceeded amount to the IRS. Liabilities for the Additional Medicare Tax and federal income, not the penalties, can be subsided by obtaining Form 4669 from the employee.

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 a marriage or divorce, they are required to furnish a new Form W-4. If the 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 Error Correction to Form W-2c Correction 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 Reduction in Federal Income Tax Withholding in Connection With a Gross-Up After December 31

According to the IRS Chief Counsel Advice (CCA), a prior year gross-up of income tax represents tax actually withheld, even if the employer paid the tax on behalf of the employee through the gross-up. The CCA also states that employers can’t claim refunds in excess of federal income tax withholdings remitted in a prior calendar year due to a gross-up.

The CCA advises that any federal income tax refund must be claimed on employees’ federal individual income tax returns, as reflected in the Form 941-X instructions. You may reference Ernst & Young’s special report on gross-ups for additional information.

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. As a result, there is 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

  • Provide the correct EIN in box b and/or the incorrect tax year in box c..
  • 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 Social Security Administration (SSA).

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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 is deemed “administrative”. Meaning, 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 employee wages for the purpose of correcting under- or over-withholding in a previous tax year.

10. Excess Social Security/Medicare Tax Withholding

 

Box 13 “Retirement Plan” Checked in Error

It is important to fix this error as soon as it’s discovered. If box 13 for “retirement plan” is checked in error, this could lead to the employee receiving notices from the IRS for additional tax assessments.

Use Form W-3c to correct this error by checking box 13 “retirement plan” in the previously reported column and leaving it blank in the corrected amounts column.

When Should You Check Box 13?

Type of Retirement Plan Employee Conditions Should You Check the “Retirement Plan” Box?
Defined benefit plan (i.e. traditional pension plan) Employee qualifies for employer funding into the plan because of age or years of service — even though the employee may not be vested or ever collect benefits. Yes
Defined contribution plan (401(k) or 403(b) plan, Roth 401(k) or 403(b) account, but not a 457 plan) Employee is eligible to contribute
but does not elect to contribute
any money in this tax year.
No
Defined contribution plan (401(k) or 403(b) plan, Roth 401(k) or 403(b) account, but not a 457 plan) Employee is eligible to contribute
and elects to contribute money
in this tax year.
Yes
Defined contribution plan (401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan) Employee is eligible to
contribute but does not elect
to contribute any money in this
tax year, but the employer does
contribute funds.
Yes
Defined contribution plan (401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan) Employee has contributed in
past years but not during the
current tax year under report.
No (even if the account value grows due to gains in the investments)
Profit-sharing plan Plan includes a grace period
after the close of the plan
year when profit sharing can
be added to the participant’s
account.
Yes
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 considered an error.

Proactively Handle W-2 Errors

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 an all-in-one 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 and up-to-date.
  3. A cloud-based solution provides a secure, centralized database to store and protect sensitive data.

Some payroll providers offer a W-2 error checking algorithm. This tool 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.

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:

  • $50 per Form W-2 if you correctly file within 30 days of the due date, with a maximum penalty of $565,000 ($197,500 for small businesses).
  • $110 per Form W-2 if you correctly file more than 30 days after the due date but by August 1, 2020; a maximum penalty of $1,696,000 per year ($565.000 for small businesses).
  • $280 per Form W-2 if you file after August 1, do not file corrections, or you do not file required Forms W-2; a maximum penalty of $3,392,000 per year ($1,130,500 for small businesses).

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 these payroll tasks and avoid W-2 errors entirely. If your current payroll provider doesn’t offer tools like an error-checking algorithm for accurate processing when filing forms W-2, it may be time for something better.

How APS Can Help

The APS payroll solution has a built-in Form W-2 error-checking algorithm that reviews all W-2s and identifies any potential errors based on current IRS error codes and allows you to correct errors distributing W-2s to employees. Call us today at 855.945.7921 to learn more or request a customized demo.

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