Every business that has at least 1 employee has to provide an IRS Form W-2 to each of its’ employees. The W-2 reports employees’ annual taxable wages and the amount of payroll taxes withheld from those wages. Inaccuracies or errors on these forms can result in fines levied by the IRS. Let’s take a look at the most common W-2 mistakes to avoid for your business to maintain compliance.
Common W-2 mistakes to avoid
There are numerous mistakes that can occur on the Form W-2. Some of the most common and easy to avoid errors, and save your business money in fines, include:
- Incorrect employee data such as name and social security number
- Incorrect employer data such as company address or Federal EIN number
- Over contributing to retirement and health saving accounts
- Errors in formatting
- Filing late
Incorrect employee data
A common mistake that can be easily avoided is having incorrect employee data on Form W-2. Before year end, it is important to make sure all of your employee data is correct. Double check employees’ name are spelled correctly, their addresses are updated and, most importantly, their social security numbers are right.
The IRS requires employers to correct incorrect name and SSN information. Additionally, the IRS requires that employee information must match exactly 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, this will be considered an error. Errors can cost businesses up to $550 per error!
Incorrect employer data
Similarly to employee data, employers must check their own company information. Be sure that the company name is correct, the address is updated, and that the employer federal tax ID number (EIN) is correct. This information must be the same across all IRS tax forms. The IRS tracks and records employer information based of off the federal tax ID number, so it is important to verify accuracy to make sure that all tax records are tracked correctly.
The IRS has contribution limits on employee benefits such as retirement plans and health savings accounts. When an employee has contributed more than the allowed contribution limits, adjustments will need to be made.
For retirement plans such as 401(k) or 403(b), employees should contact the plan administrator to make a corrective distribution plan. For any access amounts contributed to a health savings account (HSA), employers can:
- request a return of excess funds from the financial institution to get refunded to the employee. Then, issue a Form W-2c, Corrected Wage and Tax Statements, showing the reduction in the amount reported in box 12.
- or, if you chose not to recover the excess contributions, report those funds as taxable wages on Form W-2.
The IRS and SSA are very strict when it comes formatting on W-2s. There are many common formatting errors including:
- Using decimals and cents – Employers need to use decimals and cents when entering dollar amounts on the form. $1000 should look like 1000.00.
- Ink color – Employers should only use black ink on the W-2 form.
- Font size – The font must be big enough to read, but small enough to stay within the box boundaries.
- Dollar signs – Money amounts should not have a dollar sign. $1000 should look like 1000.00.
Clients of Paper Trails will receive their packet of physical W-2s at the beginning of January. Employees can also access their W-2 through the employee self-service portal at the end of January. It is the responsibility of the employer to distribute W-2s to employees no later than January 31st each year. Additionally, employers must also send copies of all employees W-2s, along with Form W-3, to the SSA each year by January 31st.