Depositing and Reporting Withheld Taxes: Federal
Original Author: Ryan F. Donovan
Updating Author: Alice Gilman
- All employers are required to obtain a federal Employer Identification Number (EIN) from the IRS. EINs serve as account numbers employers must use when making tax deposits, filing tax returns, and when contacting or dealing in any way with the IRS or the Social Security Administration (SSA). New employers must apply for an EIN no later than seven business days after the first payment of wages. See Employer Identification Numbers.
- All employers that make tax deposits with the IRS are assigned a deposit schedule based on the amount of taxes being paid. Tax deposit frequencies can range from once a year to the next business day after a payday. Penalties and interest accrue on amounts deposited late or not deposited at all. See Payroll Tax Deposit Frequencies.
- All federal payroll tax deposits must be made using the Electronic Federal Tax Payment System (EFTPS). Employers that do not wish to use EFTPS may make their deposits using a third party, such as a payroll provider or CPA, or through their bank. See Electronic Federal Tax Payment System.
- Employers are subject to stiff penalties for failing to deposit the full amount of employment taxes due on time. Penalties may be waived for reasonable cause. See Penalties for Late Tax Deposits.
- All employers that withhold federal income and employment taxes from employees' pay must file Form 941, Employer's Quarterly Federal Tax Return. The form is used to report the total amount of taxable wages paid and the total amount of federal income, and employment (Social Security and Medicare taxes) withheld in each calendar quarter. Form 941 must generally be filed by the last day of the month that follows the end of the calendar quarter. See Form 941, Employer's Federal Quarterly Tax Return.
- Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, is used to correct errors made on a previously filed Form 941. If an employer wants to make corrections or adjustments to Form 941 for three different quarters, it must file a separate Form 941-X for each quarter. The due date for filing Form 941-X depends on the quarter in which the error is discovered and whether employment taxes were underreported or overreported. See Forms Used to Make Adjustments, Corrections, and to Receive Tax Credits and Refunds.
- Employers must make deposits and file reports for amounts withheld during the year from nonpayroll items using Form 945, Annual Return of Withheld Federal Income Tax. These items include pensions, annuities, backup withholding, and gambling winnings. See Reporting Nonpayroll Withholding on Forms 945 and 945-A.
- In addition to penalties for late deposit of taxes, the IRS imposes penalties for late filing of employment tax returns, such as Forms 941 or 944, and for not paying the tax that is due with the return. Other penalties may also apply. See Penalties for Late Reporting and Payment of Tax.
- Form W-2, Wage and Tax Statement, is used by employers to report the amount of all compensation paid to employees and all federal, state, and local income and employment taxes withheld from employees' compensation in a calendar year. There are six different copies of Form W-2 and each must be provided to the right party by a certain due date. See Form W-2 Reporting.
- Employers must ensure that the information reported on Forms W-2, Wage and Tax Statement, and Forms 941, Employer's Quarterly Federal Tax Return, balance precisely. If they do not balance, it is imperative that the reason for the discrepancy be discovered and that any underpayment of tax is immediately corrected. This will avoid inquiries from the IRS, SSA and state and local taxing agencies, and the potential assessment of penalties. See Reconciliations.
- In addition to reporting compensation paid to employees, employers also must report to the IRS payments made to nonemployees, such as independent contractors, for services performed, and payments made to retirees from pension plans, among other types of payments. Most such payments are reported annually on the 1099 series forms. See Reporting Nonemployee Payments.
- An employer may be subject to penalties for failing to file information returns (Forms W-2, W-3, and 1099s) with the IRS or SSA on time or for filing them with incomplete or incorrect information. Similar penalties apply for failure to provide information statements to employees as required. See Penalties for Failure to Properly File Information Returns; Penalties for Failure to Provide Forms W-2 or 1099.
- Employers that file 250 or more Forms W-2, Wage and Tax Statement, (Copy A) must file them electronically. Employers that do not have the technological or financial ability to file electronically despite meeting the 250 form threshold can apply to the IRS for a hardship waiver. Employers that file 250 or more of any one type of Form 1099 are also required to do so electronically. Various other employer forms must also be filed electronically. See Electronic Filing Requirements for Forms W-2 and 1099.
- Although information returns submitted on magnetic media are no longer accepted by the SSA, in many states employers must file information returns either electronically or on magnetic media. Because individual state requirements vary widely, employers should check the rules of the states in which they operate to ensure compliance. See State Electronic and Magnetic Media Form W-2 Reporting Requirements.
- Special wage payments (SWPs) are payments made to current or former employees for amounts earned in one year but paid in a subsequent year. Employers need to notify the SSA about SWPs because of the effect they have on Social Security benefits received by those under age 65. See Reporting Special Wage Payments to the SSA.
One of the most important payroll tasks is ensuring that taxes withheld from employees' pay are deposited and reported properly and on time. And the first step to be taken by every new employer that is required to make federal tax deposits is to obtain a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Upon assignment of an EIN, the employer must then follow a particular tax deposit schedule, but that schedule may vary from one payroll period to the next depending on the size of the tax deposit and certain other factors occurring over the past two years. Special rules apply to payroll periods that cover different years and/or quarters.
The most frequently used employer tax form is IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R. Form 941 is used to report the amount of taxable wages paid by an employer and the amount of taxes withheld from the wages. There are specific rules as to which employers must file it, who must sign it, and when and where it must be filed. Small employers - those that anticipate owing no more than $1,000 in payroll taxes for a calendar year may file Form 944, Employer's Annual Federal Tax Return. See Small Employer Exception. Employers that withheld taxes from nonpayroll payments during the year, such as pensions and annuities, are also required to file Form 945, Annual Return of Withheld Federal Income Tax. See Reporting Nonpayroll Withholding on Forms 945 and 945A.
The federal government requires all business tax payments to be made using the Electronic Federal Tax Payment System (EFTPS). See Electronic Federal Tax Payment System. Employers are liable for various penalties for failing to deposit withheld taxes on time and for not depositing the full amount required. In addition to penalties for late tax deposits, employers are also subject to penalties for late filing of employment tax returns and/or any payments due upon filing. Employers may not shift responsibility to another party, such as a payroll service or CPA, but the IRS will excuse some or all penalties if the employer has a reasonable explanation for the failure.
Employers must provide Forms W-2, Wage and Tax Statement, to all employees annually to report all wage payments and taxes withheld. Form W-2 has six different copies, each of which must be provided to the right party by certain due dates. Form W-3, Transmittal of Wage and Tax Statements, serves as a reconciliation statement for the W-2s. In the event that an error is made on a Form W-2, correction Forms W-2c and W-3c must be filed. Employers also must annually report nonemployee payments, such as those made to independent contractors or for retirement benefits, on the 1099 series of forms. If a certain number of Forms W-2 or 1099 are filed, the employer must file them electronically. See Form W-2 Reporting; Reporting Nonemployee Payments.
Employers also must ensure that payroll and tax figures are reconciled periodically. This is especially important at the end of each quarter and annually. Keeping the payroll books in balance will avoid IRS inquiries and the possible the imposition of penalties. See Reconciliations
The IRS offers various electronic and online tax filing methods for employers' convenience, and in many cases electronic filing is mandatory. Some older forms of electronic media, such as data tapes and diskettes, are falling out of favor with federal and state governments and in some cases have been completely disallowed.
Employer Identification Numbers
The IRS assigns a federal Employer Identification Number (EIN) to every employer. It serves as an account number the employer must use when making tax deposits, filing tax returns, and when contacting or dealing in any way with the IRS or the Social Security Administration (SSA). +I.R.C. § 6109.
A new employer must apply for an EIN no later than seven business days after its first payment of wages. An employer that operates more than one business or under more than one name should only use one EIN, unless it has separate but affiliated corporations. In the latter case, each EIN is considered to be a separate employer.
In addition, if a corporate merger or acquisition occurs, a new EIN will be needed if a new corporation is formed. However, if a reorganization occurs, the surviving corporation must use the EIN it had before the reorganization. +Rev. Rul. 73-526, 1973-2 CB 404; IRS Publication 15, Circular E, Employer's Tax Guide.
Applying for an EIN
New employers can apply for an EIN online, by phone, by fax or by US mail depending on how fast the employer needs it. For all methods of applying other than online, employers must complete and sign IRS form SS-4, Application for Employer Identification Number. Employers should only use one application method for each business entity so as not to receive more than one EIN for an entity. See IRS SS-4 Form, Application for Employer Identification Number.
An EIN may be obtained immediately by completing an online fill-in application on the IRS website. A third party, such as a tax preparer or accountant, may request an EIN online in an employer's behalf, so long as the employer has signed a copy of Form SS-4 and has provided an authorization allowing the third party to apply. Authorization requirements are provided on the IRS website.
An EIN may also be applied for, and received within four business days, by fax using the IRS's so-called Fax-TIN system. The employer must complete and fax Form SS-4, along with the employer's return fax number, to one of the dedicated IRS fax numbers listed on the Form SS-4 Instructions. If this method is used, the employer must be sure to provide an accurate and legible fax number in order to receive the EIN back from the IRS.
US Mail Applications
If an employer prefers to submit an application by US mail, it must complete, sign, and date Form SS-4 and mail it to the service center address in the employer's state. Since turnaround time may be as long as four weeks, the form should be mailed at least five weeks before the EIN will be needed.
For EIN purposes, a responsible party is the person ultimately responsible for the timely and accurate filings made by an employer. The IRS will only issue one EIN per responsible party each day, whether the request is made online, by fax or mail. A nominee is a party that has been delegated the authority to act on an employer's behalf but is not the responsible party. A third party can receive an EIN, but only if the employer validly and specifically authorizes it when requesting an EIN. IRS Publication 1635, Understanding Your EIN.
Mary Smith is the Chief Financial Officer at Acme Manufacturing. The corporate officers decide to launch a separate EIN for one of their larger divisions in order to keep the corporate dealings in each section of the business separate. Since the needed new EIN does not already exist, Mary must request one. Since she is the responsible party for the tax filings that will occur under the new EIN, she is authorized to request the EIN. Although Mary learns of the need for the new EIN in January of the current year, it will not be used for tax purposes until the beginning of the next year. Mary should take the following steps:
- Choose a method to apply for the new EIN. Given the amount of time she has, she can use any one of the available methods and still get the EIN in plenty of time before it is needed. Mary prefers to apply online because it is the quickest and safest method.
- Before making the online request, Mary assembles and verifies all of the information she will need to apply for the EIN and completes Form SS-4. This information includes the legal name and address of the new company, the corporate structure of the business, e.g., LLC, S-Corp, etc., and other pertinent information.
- Once Mary is certain Form SS-4 is complete and all of the information is correct, she uses it to fill out the online request on the IRS website. She does NOT also send the form to the IRS since EIN requests should be made using only one of the available methods so as not to risk receiving multiple EINs.
- Mary receives the EIN immediately and provides it to others in the organization that need to have it. She also designates all of the parties who will be authorized to file information using the EIN, and those who will be authorized to contact the IRS to discuss matters relating to that EIN.
Updating Responsible Parties
Under final IRS regulations, business entities that have an EIN are required to provide updated information to the IRS as, and when, required by forms, instructions or other guidance that the IRS may issue. This includes updated information on the responsible party (e.g., name and taxpayer identification number). The requirement applies to entities that have listed an individual other than a responsible party (e.g., a "nominee") in a previous EIN application.
Employers must use Form 8822-B, Change of Address or Responsible Party - Business, for this purpose. The instructions to the form provide the manner and frequency for providing the updated information. The form must be filed within 60 days of a change in the identity of the entity's responsible party information. While there are no penalties for failure to file the form, if an entity fails to provide the identity of a responsible party, and that party fails to receive a notice of deficiency or demand for tax, penalties and interest will accrue.
The IRS will use the information provided on Form 8822-B to determine the correct ownership details for businesses with an EIN so that it will be able to contact the correct individuals when attempting to resolve tax matters. The updated information will also help prevent tax system fraud or abuse that may occur by the use of nominees in EIN applications. +78 F.R. 26244.
Payroll Tax Deposit Frequencies
Every employer that makes tax deposits with the IRS is assigned a deposit schedule based on the amount of taxes paid during the four calendar quarters. Tax deposit frequencies can range from once a year to the next business day after a payday. Penalties and interest accrue on amounts deposited late or not deposited at all. An employer's frequency is based on two primary pieces of data. The first is the usual amount of taxes deposited per payroll period. The second is whether and when deposit amounts go above or below certain thresholds. Special rules apply when there are holidays or the year or quarter is coming to a close.
Monthly and Semiweekly Depositors
Employers that are required to file Form 941, Employer's Quarterly Federal Tax Return, must make tax deposits on either a monthly or semiweekly basis. Small employers that choose to file Form 944, Employer's Annual Federal Tax Return, must also make tax deposits monthly or semiweekly if their tax liability for the current calendar quarter exceeds $2,500. Small employers that choose to file Form 944, Employer's Annual Federal Tax Return, must also make tax deposits monthly or semiweekly if their tax liability for the current calendar quarter exceeds $2,500. See Form 941, Employer's Quarterly Federal Tax Return; IRS Form 944, Employer's Annual Federal Tax Return.
The total amount of federal income, Social Security and Medicare taxes the employer is required to deposit during a lookback period determines which deposit status classification applies to the employer. For Form 941 purposes an employer's lookback period is the 12 month period starting from July 1 of the second previous year through June 30 of the previous year.
For example, the lookback period for calendar year 2017 is July 1, 2015 - June 30, 2016; the lookback period for calendar year 2018 is July 1, 2016 - June 30, 2017.
If an employer's total federal tax liability for its quarterly Forms 941 during the lookback period is $50,000 or less, then the employer must deposit on a monthly basis in the next calendar year. If the total is more than $50,000, the employer must deposit on a semiweekly basis. Because deposit status is determined each year and tax liability for the lookback period may go above or below $50,000, an employer may have to switch back and forth between monthly and semiweekly deposits from one year to the next.
The IRS notifies employers of deposit status changes. If an employer's status is unchanged, no notification will be provided and the employer should continue to make deposits with the same frequency as in the prior year. The IRS should be contacted if there is any uncertainty about whether the right schedule is being followed.
Monthly Deposit Due Date
Monthly depositors must deposit their accumulated taxes for each calendar month by the 15th of the following month. For example, tax deposits for April of any given year would be due by May 15 of the same year.
Semiweekly Deposit Due Date
Semiweekly depositors must deposit their accumulated taxes as follows: if wages are paid on Wednesday, Thursday, or Friday, the deposit is due by the following Wednesday; if wages are paid on Saturday, Sunday, Monday, or Tuesday, the deposit is due by the following Friday.
For example, if wages are paid on Friday, April 7, the taxes for that payroll period must be deposited by the following Wednesday, April 12. If wages are paid on Monday, April 10, the tax deposit is due by Friday, April 14.
One-Day Deposit Rule Exception
There is one major exception to the monthly and semiweekly deposit rules. If accumulated taxes amount $100,000 or more on any day in a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next banking day without fail.
For monthly depositors, only taxes accumulated during the current calendar month are considered in making this determination. In addition, if the one-day deposit rule is triggered by a monthly depositor, it immediately becomes a semiweekly depositor for the rest of the current calendar year and the next calendar year.
For semiweekly depositors, only taxes accumulated during the current semiweekly period (either Wednesday - Friday, or Saturday - Tuesday) are considered in making the determination. A semiweekly depositor will then resume its normal frequency unless/until the one-day deposit threshold is reached again.
Semiweekly Periods Overlapping Two Quarters
Sometimes a semiweekly period overlaps the end and the beginning of two different quarters. If the employer pays wages on two days in the different quarters during that semiweekly period, it will have to make two separate tax deposits with the relevant quarter indicated for each. The amounts due cannot be combined into a single deposit.
For example, if wages are paid on Wednesday, September 13, and another pay date is on Thursday, October 5, the deposit of accumulated withheld taxes for both of these payments is due the following Thursday, October 12, but it must be made as two separate payments, one per payday, with the associated quarter noted for each. See IRS Publication 15, Circular E, Employer's Tax Guide.
Note that the one-day deposit threshold would also apply to each individual deposit. Thus, so long as neither of the deposits amounts to $100,000 or more, the next-day deposit rule is not triggered even if the total amount is $100,000 or more.
Quarterly De Minimis Deposits
The term de minimis means that an amount is so small as to be considered inconsequential. Thus, employers that have an accrued tax liability of less than $2,500 for the current or preceding quarter have the option to deposit the taxes according to their assigned monthly or semiweekly schedule, or to make the deposit when they file their quarterly Form 941 at the end of the quarter.
Acme Widget Corporation is a monthly depositor and it has an accrued tax liability of less than $2,500 for the month of April, the first month in the second calendar quarter. Acme can either deposit the taxes by May 15 according to its monthly schedule, or it can make the deposit at the same time it files its quarterly Form 941 in July.
Small Employer Exception
Very small employers whose annual payroll tax liability is $1,000 or less can choose to file annual Form 944, Employer's Annual Federal Tax Return, by January 31 after the year being reported, and make the deposit at that time, rather than filing Form 941 quarterly and, in most cases, making tax deposits monthly or semiweekly. A 10-day extension is permitted for employers that have deposited all their taxes on time.
Once an employer's liability exceeds the $1,000 limit in any year, the IRS will notify the employer to begin or resume filing quarterly Forms 941 in the next year. If this occurs, the employer must deposit its January liability by March 15.
Employers that have previously filed Form 941 or Form 944 and want to opt into or out of filing Form 944 for the current calendar year, must call the IRS at the number specified on Form 944 by April 1 of the current year (or by the next business day if April 1 falls on a Saturday or Sunday).
New employers that want to opt into or out of filing Form 944 for the current year must call the IRS by the first day of the month that the first required Form 941 is due (e.g., by the first business day of April, July, October or the immediately following January).
Employers that want to write to the IRS to request to opt in or out of filing Form 944 for the current year must postmark their written correspondence by March 15th of the current year.
Employers that previously received notification from the IRS of their qualification to file Form 944 must continue to file Form 944 unless the IRS notifies them that they no longer qualify to file Form 944 or they opt out of filing Form 944. +Rev. Proc. 2009-51, 2009-45 IRB LEXIS 625.
In addition, if the employment tax liability of a Form 944 filer exceeds $2,500 in a calendar year, but it does not exceed that amount in a quarter, the employer must deposit all employment taxes due for the quarter by the end of the month following the end of the quarter. The fourth quarter taxes should be deposited either by the following January 31 or with Form 944. Thus, if a Form 944 filer's annual liability is more than $1,000, but not more than $2,500 in any quarter, it can still take advantage of the quarterly de minimis deposit rule that applies to Form 941 filers.
Nonbusiness Day Due Dates
If an employer's normal tax deposit due date falls on a weekend (Saturday or Sunday) or a federal legal holiday, the due date automatically shifts forward to the next business day. +I.R.C. § 7503. Also, semiweekly depositors are allowed at least three business days after the last day of the semiweekly period to make the deposit. This gives the employer an extra day to deposit in case any of the three weekdays after the semiweekly period is a nonbusiness day.
Acme Widget Corporation is a monthly depositor. If its deposit for February would normally be due by February 15, but in that year February 15 happens to be Presidents' Day, which is a federal holiday, the due date shifts forward to the next business day under the federal weekend and holiday rule to Tuesday, February 16.
Note that only federal legal holidays and holidays celebrated in the District of Columbia are considered when shifting deposit due dates. State holidays that are not also federal legal holidays do not affect deposit due dates for federal tax liabilities.
Deposit Shortfall Rule
The IRS gives employers a break from failure to deposit penalties if a deposit is made in an amount that is slightly less than the full amount due. An employer is considered in compliance if the shortfall amount is not more than $100 or two percent of the full amount due, whichever is greater. If the full amount of a deposit is $5,000 or less, the allowable shortfall is $100. If the deposit exceeds $5,000, the allowable shortfall is two percent of the total amount due.
Thus, if the amount due to be deposited is $20,000, the employer may not short the deposit by more than $400, and it may deposit $19,600 ($20,000 x 0.02 = $400). For a deposit of $3,500, the employer may not short the deposit by more than $100, and it must deposit $3,400.
However, to avoid penalties under this rule, the deposit must be made on time and the shortfall amount must be deposited by the correct make-up date. Specifically, monthly depositors must pay the shortfall with quarterly Form 941 by the Form 941 due date for the quarter in which the liability accrued. This make-up date applies even if that would bring the employer's total Form 941 payment to more than $2,500. See IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R; IRS Publication 15, Circular E, Employer's Tax Guide.
Semiweekly depositors have until the first Wednesday or Friday that occurs on or after the 15th of the month after the month in which the original deposit was due, or by the quarterly Form 941 due date if that is earlier. However, the shortfall must be deposited separately; it should not be paid along with the filing of Form 941.
Electronic Federal Tax Payment System
The federal government provides an electronic tax payment infrastructure called the Electronic Federal Tax Payment System (EFTPS). Employers using the system pay their federal tax bills using the Automated Clearinghouse (ACH) system. The two ways to pay via the EFTPS system are ACH debit and ACH credit. ACH debit occurs when the federal government initiates an ACH transaction that debits the employer's account for taxes due. An ACH credit transaction occurs when the employer's bank initiates the process and sends the money to the US Treasury.
If an employer uses the ACH debit method, there are two different ways for an employer to initiate a payment. Both of these methods fall under what the federal government calls EFTPS-Direct. The first method of payment, known as EFPTS-Online, allows an employer to initiate a tax payment over the internet upon entering the relevant EIN, the PIN associated with that EIN and an internet password, which is obtained by calling EFTPS customer service. The other method, known as EFTPS-Phone, allows for a payment to be originated over the phone. Employers are not locked into using either method as they are interchangeable by design.
Both ACH debit and ACH credit methods use the same ACH money movement system. Only the originator of the transaction is different between the two methods. Employers should note that not all financial institutions offer the ACH credit service and not all employers are eligible for it.
In the past, use of EFTPS was voluntary for some employers and paper coupons were still distributed by the federal government. Today, all federal business tax payments, including all federal payroll tax deposits, must be made using EFTPS.
Employers that do not wish to use EFTPS may make deposits using a third party, such as a payroll provider or CPA, or through their bank. Employers with a total employment tax liability of less than $2,500 in the current or preceding quarter are not required to use EFTPS and can pay their taxes with their Form 941. See Form 941, Employer's Quarterly Federal Tax Return.
New users of EFTPS must ensure that they are properly enrolled. Any employer in receipt of a new EIN (and any employer that paid and filed using paper deposit coupons and checks in 2010) is automatically enrolled in EFTPS. These employers receive an informational mailing that provides their personal identification number (PIN) and other relevant information. Recipients of PINs simply need to call an 800 number to complete their setup and activate their account.
Any employer that is not automatically enrolled as described above must do so on its own, by enrolling online at EFTPS.gov. Enrollment should be completed at least 10 weeks before the first electronic tax deposit is due. Employers seeking more information should browse the EFTPS website.
Penalties for Late Tax Deposits
The IRS imposes substantial penalties on employers that do not deposit the full amount of tax due on time. While there are certain exceptions that allow employers to dodge some penalties, the IRS is usually very reluctant to abate a penalty unless the employer can prove that it had reasonable cause for the failure.
An employer may seek penalty abatement if it is unable, after reasonable efforts, to get a bank account or make other arrangements for depositing its payroll taxes. Before seeking penalty abatement, an employer must:
- Be on time in meeting its tax deposit obligations;
- Make reasonable efforts to get a bank account during the period at issue; and
- Submit a signed statement explaining its attempt to get a bank account along with any corroborating documentation (i.e., denied account applications, correspondence from banks, etc.). The signed statement does not have to be in a particular format.
The following penalties apply if the full amount of tax due is not deposited on time:
- 2% of the amount not deposited if the deposit is not more than five days late;
- 5% of the amount not deposited if the deposit is not more than six to15 days late;
- 10% of the amount not deposited if the deposit is more than 15 days late (this also applies to payments made within 10 days after the employer receives its first late notice from the IRS or if not deposited electronically); and
- 15% of the amount not deposited if the deposit is not made within 10 days after the employer receives its first late notice from the IRS, or if the amount is not paid on the same day that the employer receives a notice and demand for payment from the IRS.
Interest accrues from the date of the missed deposit and it compounds daily. As the employer's balance grows, the amount of interest accruing day to day grows larger and larger because it accrues against the total balance at that given time rather than against only the original amount due. Reducing the amount owed by making installments or other payments will reduce the impact of the compounding interest.
Penalty Waiver Exception
Certain employers that unintentionally fail to deposit employment taxes on time may be entitled to an IRS waiver of the above-listed penalties. A waiver may be granted if all of the following requirements are met:
- The employer's net worth is not more than $7 million, or $2 million if the employer is an individual;
- The failure to deposit occurred in the first quarter, or it was the first deposit the employer was required to make after a change in its deposit frequency; and
- The employer filed its quarterly Form 941 return on time.
Employer Remains Liable Despite Outsourcing
A very large number of employers utilize third party payroll service providers and/or outside accountants, called payroll reporting agents, to perform some or all of their tax depositing and filing tasks. See Payroll > Payroll Solutions > Outsourcing Payroll. However, this does not absolve the employer from liability if deposits or filings are made late or incorrectly by the third party.
Even if the third party compensates the employer for the mistake, the employer is still responsible to pay the penalties as the owner of the EIN in question. See Employer Identification Numbers. Even any IRS refunds of penalties will be paid directly to the employer.
A number of federal courts have agreed with the IRS's position as it relates to outside accountants. Dogwood Forest Rest Home, Inc. v. U.S., +181 F. Supp. 2d 554 (MD N.C., 2001); Pediatric Affiliates v. U.S., +2007 U.S. App. LEXIS 8662 (3d Cir. N.J. 2007); Lanco Inns v. IRS, +2006 U.S. Dist. LEXIS 44779 (N.D.N.Y., 2006); McNair Eye Center, Inc. v. Commissioner, +TC Memo 2010-81 (2010).
To ensure that employers are made aware of their continuing liability for depositing their payroll taxes and filing their payroll tax returns, the IRS requires all reporting agents to provide their client-employers with a statement each calendar quarter. The IRS has prepared the following model statement that payroll reporting agents may use.
Please be aware that you are responsible for the timely filing of employment tax returns and the timely payment of employment taxes for your employees, even if you have authorized a third party to file the returns and make the payments. Therefore, the Internal Revenue Service recommends that you enroll in the U.S. Treasury Department's Electronic Federal Tax Payment System (EFTPS) to monitor your account and ensure that timely tax payments are being made for you. You may enroll in the EFTPS online at www.eftps.gov, or call (800) 555-4477 for an enrollment form.
State tax authorities generally offer similar means to verify tax payments. Contact the appropriate state offices directly for details.
Reporting agents who choose to use their own statements, instead of the IRS's statement, must advise their client-employers of the following information:
- They are responsible for filing returns and depositing their payroll taxes on time;
- Their authorization of a reporting agent to deposit their payroll taxes and file their forms does not relieve them from any liability to the IRS if the reporting agent fails to perform those tasks;
- They should enroll in and use EFTPS to ascertain whether their reporting agent has made tax deposits; and
- That state-level tax verification programs may also be available.
+Rev. Proc. 2012-32, 2012-34 IRB LEXIS 267.
In addition, the IRS must issue a notice confirming an employer's change of address. This notice must be sent to the employer's old and new addresses. The purpose of the notice is to prevent unscrupulous third parties from changing the address to which tax notices are sent without the employer's consent.
Liability Under Three-Party Arrangements
Final regulations under IRC § 3504 describe circumstances that help determine which party is liable for an employer's employment tax obligations when an employer has entered into a service agreement with a third-party payor. Obligations often covered in such agreements may include withholding employment taxes from employees' pay, making wage payments to employees, and timely reporting and remitting an employer's employment taxes to the appropriate government agencies.
Employers may mistakenly believe they are relieved of employment tax liability by entering into an agreement with a third-party payor, e.g., an employee leasing company or professional employer organization (PEO), for help in fulfilling their employment tax obligations. However, an employer remains liable for employment taxes regardless of any type of agreement that attempts to shift liability to a payor. IRC § 3401(d)(1) provides one exception - where the person/entity for whom/which services are performed and the person/entity with control of wage payments for those services are not the same.
The IRS bases status as an employer on all the facts and circumstances under the common law test. Neither claims by a payor that it is the employer or co-employer of a worker, nor the fact that the payor may file employment tax returns under its own employer identification number (EIN), determine the identity of the employer liable for employment taxes. Consequently, the parties to a three-party arrangement may not always understand which party or parties will be liable for any unpaid employment taxes. The IRS has established administrative procedures that allow a payor to request authorization on Form 2678, Employer/Payor Appointment of Agent, to file employment tax returns and perform other acts for the employer.
The final regulations establish rules regarding the employment tax obligations under three-party arrangements which provide that the payor will be liable for some or all of the employer's employment tax obligations, even if the payor:
- Has not obtained an approved Form 2678 from the employer;
- Does not qualify as a § 3401(d)(1) employer; and
- Is not a payroll service provider (PSP) or reporting agent.
In addition, if a payor is designated as an agent to perform the obligations of an employer, all laws and penalties applicable to the employer are applicable to that payor. However, each employer for whom the payor may act also remains subject to all applicable laws and penalties. The regulations note that the IRS will only collect an employer's employment tax liability once, whether from the employer or the payor.
Under the final regulations, a payor qualifies as an "agent" under +I.R.C. § 3504 to perform the acts of an employer in any case in which the payor entered into a service agreement with an employer. A "service agreement" means a written or oral agreement in which the payor:
- Asserts it is the employer or co-employer of the workers performing services for the employer;
- Pays wages or other compensation to the workers for their services performed for the employer; and
- Assumes responsibility for the collection, reporting, and payment of, or liability for, any employment taxes with respect to those wages or other compensation.
A third party may implicitly or expressly assert it is an employer or co-employer by:
- Either separately or together with the employer, recruiting, hiring or assigning workers as permanent or temporary members of the employer's workforce;
- Hiring the employer's workers as its own and then providing them back to the employer to perform services for the employer; or
- Filing employment tax returns using its own employer identification number (EIN) that include wages or compensation paid to the workers performing services for the employer.
A third party assumes the liability to collect, report and pay employment taxes if it represents to the employer that it will make any or all of the required federal employment tax deposits. Examples showing how to apply the regulations, as well as exceptions, are included in the final regulations.
The IRS still has the right to determine that a payor is the common law employer, or the § 3401(d)(1) employer, of the employer's workers, or that the payor is liable under some other section of the IRC.
The final regulations also clarify that a payor is not designated to perform the acts required of an employer under the rules for any wages or compensation paid by the payor to an individual performing services for an employer, if the payor is the individual's employer. This exception includes IRC § 3401(d)(1), or statutory, employers.
The final regulations do not clarify whether, under § 3504, a payor of group disability income benefits (i.e., an insurance company) under an administrative services contract with an employer is required to file Form 2678. The regulations note that § 32.1 of the employment tax regulations already provides specific rules for reporting employment taxes related to payments made by a third party on account of sickness or accident disability. And, while § 32.1 is not affected by IRC § 3504 or the final regulations, the final regulations nevertheless add a clarification of how both sets of rules interact.
Professional Employer Organizations (PEOs)
Until July 1, 2016, when an employer contracted with a PEO to administer its payroll functions, the employer remained responsible for all withholding taxes with respect to its employees. Thus, even though the PEO paid the employees, the employer remained liable if the PEO failed to withhold or remit the taxes or otherwise comply with related reporting requirements.
However, beginning with wages paid after July 1, 2016, the IRS is authorized to certify PEOs that post a bond, pay annual fees and meet other qualifications. These PEOs are solely responsible for their clients' payroll taxes.
Once a PEO is certified by the IRS and entes into a contract with a client-employer, the PEO becomes the successor employer. Therefore, the PEO takes credit for the FICA and FUTA wages already paid to the client's employees. When the contract terminates, the client-employer becomes the successor employer.
Contracts between a PEO and a client-employer must cover at least 85% of a client-employer's worksite employees and meet specific standards. These standards include that the PEO will assume responsibility for:
- Paying wages to the client-employer's employees, regardless of whether the client-employer provides adequate funds;
- Reporting, withholding and paying payroll taxes, regardless of whether the client-employer provides adequate funds;
- Any employee benefits, regardless of whether the client-employer provides adequate funds;
- Recruiting, hiring and firing employees, in addition to the client-employer's responsibility for recruiting, hiring and firing employees; and
- Maintaining records related to employees.
Certified PEOs can make client-employers' state quarterly unemployment contributions and may take a credit for doing so.
An employer that contracts with a PEO not certified by the IRS is liable for any unpaid taxes if the PEO defaults.
Penalty Avoidance If Reasonable Cause
An employer that has failed to deposit payroll taxes on time may be able to avoid the imposition of a penalty if it can show it had reasonable cause for the failure. The employer must file a statement (under penalty of perjury) with the IRS district director, or the director of the IRS service center in the employer's area, providing facts that support the claim of reasonable cause. The penalty will be waived if the director agrees with the claim.
Averaged Failure-To-Deposit Penalty
Employers should also bear in mind that the IRS can assess what is known as an averaged failure-to-deposit penalty of 2% to 10%. This penalty can be applied against a monthly depositor that does not fill out the monthly liability section of Form 941 correctly. It can also be applied against a semimonthly depositor that fills out the monthly liability section in error rather than Form 941 Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, or that completes Schedule B incorrectly. See Schedule B.
For either situation, the penalty is only applied against employers whose quarterly tax liability exceeds $2,500. The penalty is based on the IRS's averaging of the employer's tax liability throughout the entire tax period, because it cannot establish when the tax deposits truly should have been made.
100% Penalty for Failure to Withhold and Pay Taxes
Individuals who are responsible for withholding and remitting payroll tax deposits to the IRS but willfully fail to do so are liable for an additional penalty in the amount of the total amount of taxes owed. Reasonable cause will not avoid the 100% penalty. +I.R.C. § 6672.
In determining who is a responsible person, the IRS considers the job duties and authority of the individual. Clerical payroll employees and employees who are not owners and work under the authority of a manager, even if they are authorized to sign checks, are generally not considered responsible persons.
An employer or responsible person has willfully failed to withhold and remit payroll taxes if it does so despite having knowledge of the requirement to withhold and remit. This often occurs where an employer is short on funds and pays other obligations first, such as to contractors or creditors, rather than paying the IRS in order to keep the business afloat.
A responsible person who willfully fails to withhold and remit payroll taxes is guilty of a felony and may be fined up to $10,000, and/or may be imprisoned for up to five years. Criminal penalties apply in addition to the 100 percent penalty. +I.R.C. § 7202.
Form 941, Employer's Quarterly Federal Tax Return
Any employer that withholds federal income and employment taxes must file Form 941, Employer's Quarterly Federal Tax Return. See IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R. The form is used to report the total amount of taxable wages paid and the total amount of federal income, and employment taxes (Social Security and Medicare taxes) withheld in each calendar quarter.
The IRS compares each quarterly Form 941 filed by an employer with the employer's tax deposits made for the same quarter and with the information provided to employees annually on Form W-2, Wage and Tax Statement. See Form W-2 Reporting The IRS website includes a page devoted solely to Form 941; the IRS posts any new or future developments affecting the form on the website.
The following employers are not required to file Form 941:
- Employers that file Form 944 because their annual employment taxes are $1,000 or less (see Small Employer Exception);
- Seasonal employers that do not pay wages in every quarter;
- Businesses that do not pay wages but only withhold federal income tax from nonpayroll payments(e.g., pensions, annuities, gambling winnings, and backup withholding);
- Employers that only pay wages to and report withheld taxes from domestic workers;
- Employers that only pay wages to employees working in Puerto Rico and US territories and possessions outside the continental US; and
- Agricultural employers (unless they also pay employees who do not perform agricultural work).
Employers that are semimonthly depositors at any time during a quarter, and that includes monthly depositors that had a $100,000 deposit in any single month, must file Schedule B of Form 941, which breaks out monthly employment tax liability, not tax deposits actually made. This distinction is very important and it is vital that employers not confuse these two numbers. See IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R.
Note that specific filing requirements apply to business closures and reorganizations, and to mergers, acquisitions, and consolidations. The requirements applicable to business reorganizations and closures are explained in the Instructions to Form 941, and the requirements applicable to mergers, acquisitions, and consolidations are explained in the Instructions for Schedule D of Form 941. See IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R. +Rev. Proc. 2004-53, 2004-34 IRB LEXIS 320; +Rev. Rul. 62-60, 1962-1 CB 186.
Schedule R of Form 941 is simply a Form 941 filed in aggregate form. It is filed in situations where an IRS-authorized agent files for multiple EINs on a combined and condensed form. The form has enough room for 15 EINs, but more can be filed for by using continuing sheets. Each separate EIN on a Schedule R is referred to as a client. See Employer Identification Numbers.
When to File Form 941
Form 941 must generally be filed by the last day of the month that follows the end of the calendar quarter. That is, by April 30 for the 1st quarter, by July 31 for the 2nd quarter, by October 31 for the 3rd quarter, and by January 31 for the 4th quarter. There are two exceptions to this rule.
One exception is that if the due date falls on a federal legal holiday or weekend (Saturday or Sunday), the form must be filed by the next banking day. See Nonbusiness Day Due Dates. The other exception is an automatic 10-day extension that is allowed for employers that have deposited all of their taxes for the quarter on time. An employer that is going out of business must file the final 941 by the due date for the quarter in which it stopped paying wages.
When Mailed Forms Are Considered Filed
Many employers prefer to file Forms 941 electronically because feedback and proof of filing is received almost immediately. See Electronic Filing of Forms 940, 941, and 944. However, if an employer prefers to mail Forms 941 to the IRS, the form will be considered filed on the date the mailing envelope was postmarked by the US Postal Service. Similarly, registered mail is considered mailed on the registration date, and certified mail is considered mailed on the date the employer's receipt is postmarked. +I.R.C. § 7502.
The same rules apply to shipments sent via private delivery services, which include only certain services of FedEx and UPS. The list of acceptable services is provided in IRS Publication 15, as supplemented by IRS Notice 2016-30.
Employers should note that proof of a package being shipped is not the same thing as proof that a package was delivered. Employers should check and double check their shipping information and make very sure to retain a tracking number so that transit and delivery can be monitored.
Where to File Form 941
The address to which a completed Form 941 should be sent is provided in the Form 941 filing instructions. The address varies based on the region in which the employer is located. Payments to be remitted with payment vouchers must be sent to a separate address, which is also provided in the Form 941 instructions. See IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R.
Forms 941-PR and 941-SS for US Territories
Employers that have employees in Puerto Rico must file Form 941-PR, Employer's Quarterly Federal Tax Return. Employers with employees in the US territories of American Samoa, Guam, the Northern Marinara Islands, and the Virgin Islands must file Form 941-SS, Employer's Quarterly Federal Tax Return. Only Social Security and Medicare tax liabilities are reported on these two forms. Federal income tax withheld must be reported by such employers separately on the standard Form 941. See Planilla para la Declaracion Federal TRIMESTRAL del Patrono - IRS Form 941-PR, Schedule B, and Instructions; IRS Form 941-SS , Employer's Quarterly Federal Tax Return - American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands.
Forms Used to Make Adjustments, Corrections, and to Receive Tax Credits and Refunds
Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund
Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, is used to correct errors made on a previously filed Form 941. Form 941-X should be used in a 1:1 ratio to each quarter being corrected. Thus, if an employer wants to make corrections or adjustments to Form 941 for three different quarters, it must file a separate Form 941-X for each quarter. Form 941-X should not be filed if Form 941 was not filed for one or more quarters. An original Form 941 should be filed instead for each of those quarters. Form 941-X should always be filed separately from Form 941. See IRS Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
Form 941-X Due Dates
The due date for filing Form 941-X depends on the quarter in which the error is discovered and whether employment taxes were underreported or overreported. The following due dates apply (further explanation is provided in the Instructions for Form 941-X).
- Underreported tax. To correct and pay underreported tax, the form must be filed and payment must be made by the due date of the Form 941 for the quarter in which the error was discovered. This will keep interest from accruing and the employer will not be subject to penalties for failing to pay or deposit.
- Credit for overreported tax. If taxes were overreported on Form 941 and the employer wants to apply the credit to Form 941, it should file Form 941-X soon after the error is discovered but more than 90 days before the time limit for claiming a credit or refund on Form 941 expires.
- Claim for refund of overreported tax plus interest. If taxes were overreported on Form 941, a claim for refund or abatement may be filed on Form 941-X any time before the time limit on credits or refunds on Form 941 expires. If underreported amounts also need to be corrected, another Form 941-X must be filed reporting only corrections to the underreported amounts.
- General time limit for correcting overreported and underreported taxes. Overreported taxes on a previously filed Form 941 must be corrected on Form 941-X within three years of the date the Form 941 was filed, or two years from the date the tax reported on Form 941 was paid, whichever is later. Underreported taxes on a previously filed Form 941 must be corrected on Form 941-X within three years of the date the Form 941 was filed. For purposes of these time periods, all Forms 941 for a calendar year that are filed on time are considered to have been filed on April 15 of the next calendar year.
See also Future Developments, for information about a proposed revenue procedure (which employers may rely on until finalized) that guides employers on the use of employee consents to support refund claims.
Form 843, Claim for Refund and Request for Abatement
Form 843, Claim for Refund and Request for Abatement, is used to request a refund or abatement of assessed interest, additions to tax, or penalties. Form 941-X has replaced Form 843 for clients seeking a refund of overpaid taxes. Form 843 should still be used for abatement requests. See IRS Form 843, Claim for Refund and Request for Abatement.
Final IRS regulations clarify that, unless otherwise directed, the proper place to file a claim for credit or refund is with the service center at which an employer currently files tax returns for the type of tax to which the claim relates, regardless of where the tax was paid or was required to have been paid.
Reporting Nonpayroll Withholding on Forms 945 and 945-A
Employers must make deposits and file reports for amounts withheld during the year from nonpayroll items using IRS Form 945, Annual Return of Withheld Federal Income Tax. These items include pensions, annuities, backup withholding, and gambling winnings. Withheld nonpayroll amounts that have not yet been deposited when Form 945 is filed must be included with the form when it is submitted.
Form 945 is filed with the IRS electronically on an annual basis, by January 31 of the following year, but deposits may need to be made on a semimonthly or monthly basis, depending on the amount of all liabilities involved, using Form 945-A, Annual Record of Federal Tax Liability. Form 945 need not be filed if the employer does not have nonpayroll amounts due in a year.
Penalties for Late Reporting and Payment of Tax
In addition to penalties for late deposit of taxes, the IRS imposes penalties for late filing of employment tax returns, such as Forms 941 or 944, and for not paying the tax that is due with the return. Other penalties may also apply. See Penalties for Late Tax Deposits; Small Employer Exception.
Late Filed Returns
An employer that is late in filing Form 941, or any other employment tax return, may be assessed an addition to tax in an amount that depends on how late the return is filed, unless the employer can show that it had reasonable cause for the lateness and that it did not willfully neglect to file on time. The amount is 5% percent of the amount of tax required to be shown on the return (less any deposits that were made on time and any credits), for each month or part of a month that the return is late, up to a maximum of 25% (or 15% per month, up to a maximum of 75% of the unpaid tax if the late filing is fraudulent). +I.R.C. § 6651.
Late Tax Payments
An employer that is late in paying tax due on a return may be assessed an addition to tax in an amount that depends on how late the tax is paid, unless the employer can show that it had reasonable cause and that it was not willfully negligent. The following penalty amounts apply:
- 0.5% of any unpaid tax shown on the return (less any credits) for each month or part of a month that the payment is late up to a maximum of 25%;
- An additional 0.5% per month of any unpaid tax that is not shown on the return but for which the IRS has issued a notice and demand, if the tax is not paid within 21 calendar days of the notice and demand (10 business days if the amount is at least $100,000) up to a maximum of 25% (starting at the end of the 21-day or 10-day period).
The above penalties increase to 1% of the amount of unpaid tax for each month starting:
- 10 days after the day the employer receives a tax levy notice from the IRS (See Payroll > Involuntary and Voluntary Pay Deductions > Federal Tax Levies); or
- On the day after the day the employer receives an IRS notice demanding immediate payment and stating that it will immediately issue a tax levy.
The following additional penalties may also be imposed:
- 20% of the amount of tax not paid that is due to the employer's negligence or disregard of IRS regulations; or
- 75% of any amount not paid that is due to the fraud of the employer.
Failure to File Returns and Pay Tax
Failure to file a return and failure to pay tax are treated as separate punishable actions when they occur separately. When they occur at the same time and for the same tax period (e.g., in any month that the employer is assessed additions to tax for both a failure to file and a failure to pay), the penalty for failure to file is reduced by 0.5 percent of the unpaid tax. +I.R.C. § 6651.
Penalties for failure to pay tax and failure to file tax returns be adjusted for inflation every year.
The IRS may waive the additional penalties for late filing of returns or late tax payments if the employer had reasonable cause for the failure. The employer must file a statement (under penalty of perjury) with the IRS providing facts to support the claim. The IRS will find that the employer had reasonable cause if the employer could not file or pay on time despite acting with ordinary care and business prudence, or if the employer would otherwise suffer extreme hardship.
Employers are given until either 21 or 10 days after the IRS issues the notice and demand for payment to contest a penalty on the basis of reasonable cause. The exact time limit should appear on the IRS notice to the employer.
Employers should be aware that interest generally begins to accrue on any unpaid employment taxes and additions to tax starting from the due date and until the date the tax or addition to tax is paid in full. However, if the IRS issues a notice and demand for payment, interest will not begin to accrue until the date of the notice and demand and up to the date of payment. Interest cannot be abated. +I.R.C. § 6601.
Employers may be subject to serious criminal penalties for failure to pay employment taxes or file employment tax returns. These penalties generally range from $25,000 to $500,000 and may include imprisonment for up to five years depending on the nature of the offense and the employer's business structure. Such penalties apply for actions including willful failure to file a return, pay tax, or keep records; willful filing or signing of fraudulent returns or other documents or statements; and willful attempts to evade payment of tax. +I.R.C. § 7201, +I.R.C. § 7203, +I.R.C. § 7206, +I.R.C. § 7207.
Form W-2 Reporting
Form W-2, Wage and Tax Statement, is used by employers to report the amount of all compensation paid to employees and all federal, state, and local income and employment taxes withheld from employees' compensation in a calendar year. +I.R.C. § 6051; IRS Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, and General Instructions.
An employer must issue Form W-2 to an employee if:
- The employee is paid any amount of cash or noncash compensation for work performed;
- The employer has withheld federal income tax from the employee's wages; and
- The employee was paid at least $600 in wages and noncash compensation not subject to withholding.
Where and When to Send Form W-2
There are six different copies of Form W-2 and each must be provided to the right party by a certain due date.
Copy A of Form W-2 must be sent to the Social Security Administration (SSA) (not the IRS). Starting with Forms W-2 filed in 2017 (for tax year 2016), paper and electronic copies must be received by the SSA by the last day of January after the year to which the form applies. +I.R.C. § 6071.
The Protecting Americans from Tax Hikes (PATH) Act of 2015, [LexisNexis: "114 P.L. 113], authorizes the IRS to issue regulations requiring an employer to provide employees' identification numbers on the Forms W-2 instead of their Social Security numbers (SSN). These regulations would permit employees' SSNs to be truncated on the employees' copies of the Forms W-2. An employer would not be able to truncate SSNs on Copy A, which is filed with the SSA.
Paper Forms W-2 sent by regular US mail should be mailed to the following address:
Social Security Administration
Data Operations Center
Wilkes-Barre, PA - 18769-0001
Paper Forms W-2 sent by certified mail should be sent to the same address noted above, but with a different ZIP code: 18769-0002.
The following address should be used if the forms are sent with a private delivery service such as FedEx, UPS or DHL:
Social Security Administration
Data Operations Center
Attn: W-2 Process
1150 East Mountain Drive
Wilkes-Barre, PA - 18702-7997
Copies B, C and 2
Form W-2 Copies B, C and 2 must be either hand delivered to each employee or mailed to their home address by January 31 of the year after the year to which the form applies. The form may also be provided electronically, so long as certain requirements relating to consent, disclosure, format, posting, notice, and retention are met. +I.R.C. § 6051; IRS Publication 15-A, Employer's Supplemental Tax Guide, (Supplement to Publication 15 (Circular E), Employer's Tax Guide).
Employees must file Copy B with their federal income tax return and Copy 2 with their state or local income tax return. Employees keep Copy C for their records. Note that while employers in some states have more time to provide the state copy of the form (Copy 2) to employees, complying with the federal due date of January 31 will ensure both federal and state compliance. See State Requirements.
The January 31 due date also applies to employees that leave employment before the end of the calendar year. However, if the employee requests the W-2 immediately, the employer must provide it within 30 days if the request is in writing. Some states require it to be provided sooner. See State Requirements.
Employers must send Copy 1 to employees' state and/or local tax agencies by the due dates required by the particular states and localities. See State Requirements.
Employers should keep Copy D for their own records.
Weekends and Holidays
If the due date for filing or providing copies of Form W-2 falls on a Saturday, Sunday, or legal federal holiday, the due date is the next business day. +I.R.C. § 7503.
Substitute Forms W-2 Permitted
Employers are permitted to use substitute (e.g., privately printed) Forms W-2 instead of the standard form issued by the IRS so long as the format adheres to IRS specifications. Employers should make sure their iteration of the form is compliant before issuing them to employees. Detailed information is provided in IRS Publication 1141, General Rules and Specifications for Private Printing of Substitute Forms W-2 and W-3.
Automatic Form W-2 Filing Extension
IRS Regulation § 1.6081-8 provided an automatic 30-day extension of time to file Forms W-2 and allowed an additional 30-day non-automatic extension in certain cases. These extensions are eliminated effective with 2016 information returns filed in 2017 (except for Form W-2G, Certain Gambling Winnings) under final, temporary and proposed IRS regulations. This change makes the filed forms available earlier in the filing season for use in the IRS's identity theft and refund fraud detection processes.
New § 1.6081-T (the new temporary regulation) replaces the prior regulation. The new temporary regulation is substantially identical to the prior regulation, except that it:
- Added the 1097 series forms, Form 1095-C, Form 1094-C and Forms 3921 and 3922 to the list of information returns that are subject to rules regarding extensions;
- Removes the W-2 series forms (except Form W-2G) from the list of information returns eligible for the automatic 30-day filing extension and, instead, provides a single 30-day non-automatic filing extension for those returns; and
- Clarifies that the procedures for requesting a filing extension for forms in the 1095 series apply to Forms 1095-B and 1095-C, but not Form 1095-A.
For information on Forms 1094-C, and the 1095 series forms, see Health Care Information Reporting.
The IRS will grant the non-automatic filing extension only when a filer or transmitter has been affected by extraordinary circumstances or a catastrophe. These include a natural disaster or fire destroying the books and records needed to file the information returns. If the IRS rejects a filing extension request, any returns filed after their due dates will be considered to have been filed late, regardless of whether or when the application for the extension was filed.
The temporary regulation pertains to those who are required to file the affected information returns and need an extension of time to file. The substance of the temporary regulation is included in the proposed regulation - these regulations are effective as of July 1, 2016.
Regarding the proposed regulation, the IRS will eventually eliminate the automatic 30-day filing extension for the other forms listed in the temporary regulation and replace it with a single nonautomatic 30-day filing extension. Accordingly, the proposed regulation would remove the automatic 30-day filing extension applicable to the other listed forms. The proposed regulation would affect information returns that are due January 1 of the calendar year beginning after the date the final regulations are published in the Federal Register, but earlier than the 2018 filing season (e.g., for 2017 returns that are filed in 2018).
Form W-3 Reporting to the SSA
Employers must send Form W-3, Transmittal of Wage and Tax Statements, to the SSA with any paper copies of Copy A of Form W-2. The totals of the amounts reported on an employer's W-2 forms are included on Form W-3, which serves as a reconciliation statement for the W-2s. Electronic Copy A filers do not need to file Form W-3. Substitute Forms W-3 are also permitted to be used according to specifications that are similar to those for substitute W-2s, as noted in the preceding paragraph. See Form W-3 and Instructions.
Where and When to Send Form W-3
Form W-3 must be received by the SSA (or postmarked by the US Postal Service, or accepted by a designated private delivery service) by the same due date as Copy A of Form W-2. Starting with tax year 2016, this due date is the last day of January 2017. The due date shifts to the next business day if the last day of January falls on a Saturday, Sunday or federal holiday. Forms W-3 must be sent to the same addresses as Forms W-2. See Where and When to Send Form W-2. +I.R.C. § 7503.
Health Care Information Reporting
An employer with at least 50 full-time employees, including full-time equivalent employees, must report group health insurance offered to full-time employees and their non-spouse dependents. This information is reported to employees and the IRS on Form 1095-C; an employer must also file a transmittal, Form 1094-C.
Insurers will also file Form 1095-B and 1094-B to report the insured coverage for large and small employers. Insurers will provide the applicable form to employees.
Final information-reporting regulations provide the following:
- All full-time employees, including employees who did not receive an offer of coverage and employees who turned down an offer of coverage, must receive their forms at the same time as they receive their Forms W-2.
- An employer is permitted to provide this form in the same envelope as the employee's Form W-2.
- An employee may consent to receive his or her Form 1095-C electronically, under the same rules that apply to an employee's consent to receive his or her Form W-2 electronically.
- An employer must file forms with the IRS by February 28 if filing on paper or by March 31 if filing electronically.
- An employer that files 250 or more Forms 1095-C must file electronically, through the IRS's AIR system.
- An employer may truncate the employee's SSN on the employee's copy of Form 1095-C or 1095-B.
The regulations provide a general method that all large employers may use for reporting, and also provide two alternative reporting methods. If an employer cannot use the alternative reporting methods for certain employees it must use the general method for those employees.
Under the general reporting method, an employer completes all the relevant lines and boxes of Form 1095-C. The two alternative reporting methods were developed to minimize the cost and administrative tasks for the employer. The alternative reporting methods, in certain situations, may permit the employer to provide less detailed information than under the general method.
The alternative reporting methods are reporting based on certification of qualifying offers and reporting without separately identifying full-time employees (i.e., the 98% offer method). However, to use either alternative reporting method, certain conditions related to making offers of health insurance to employees and their dependents apply.
Correction Forms W-2c and W-3c
Form W-2c, Corrected Wage and Tax Statement, must be used to make any needed corrections to previously filed Forms W-2. Form W-3c, Transmittal of Corrected Wage and Tax Statements, must be sent to the SSA along with copies of Copy A of Form W-2c. Like Form W-2, Form W-2c has six copies that must be sent to the employee, the SSA, and any state or local tax agencies by certain due dates. And like Form W-3, the W-3c includes the totals reported on all of the Forms W-2c being sent. See IRS Form W-2c, Form W-3c, Corrected Wage and Tax Statement and Transmittal Form.
Common types of Form W-2 errors that require the filing of a Form W-2c range from mistakes in employee information, such as an employee's name, home address and Social Security number, to numerical amounts reported, such as the amount of tax paid, the amount of taxable income, etc. See Payroll > Withholding Taxes > Social Security Numbers.
Under the PATH Act, an employer will not be penalized for filing incorrect Forms W-2 if the error is $100 or less, or $25 or less if the mistake involves tax withholding. However, an employer will still have to provide Forms W-2c to employees who request them. In those cases, penalties for filing incorrect forms still apply.
Employers that file more than 250 Forms W-2c in a calendar year must submit the forms to the SSA electronically when W-2s for the immediately preceding year are being corrected.
+Rev. Proc. 2002-51, 2002-29 IRB LEXIS 175; +Rev. Proc. 2010-43, 2010-47 IRB LEXIS 738; IRS Publication 1223, General Rules and Specifications for Substitute Forms W-2c and W-3c; SSA Publication 42-014, Specifications for Filing Forms W-2c Electronically (EFW2C).
Employers should ensure that the information reported on Forms W-2, Wage and Tax Statement, and Forms 941, Employer's Quarterly Federal Tax Return, balance precisely. If they do not balance, it is imperative that the reason for the discrepancy be discovered and that any underpayment of tax is immediately corrected. This will avoid inquiries from the IRS, SSA and state and local taxing agencies, and the potential assessment of penalties. See Form W-2 Reporting; Form 941, Employer's Quarterly Federal Tax Return.
The purpose of an annual reconciliation return is to total up, or reconcile, the total income taxes that were withheld from all employees during the preceding year. Although due dates vary, most states also require that employers file annual reconciliation returns after the end of each calendar year. A handful of states do not require annual reconciliation; instead, employers must file quarterly reconciliation returns. See Annual Reconciliation Return Forms and Deadlines by State.
Balancing figures is especially important for employers that outsource their payroll to a third party payroll service. See Payroll > Payroll Solutions > Outsourcing Payroll. All deposits and reports made by the payroll service should match the employer's internal information to the penny.
Balancing by Payroll Period, Quarterly and Annually
An employer's best practice is to balance totals from all sources after every pay period and tax deposit. For example, the total tax paid for federal income tax on the totals page of the payroll register should match the coinciding deposit made with the IRS. Before the last tax deposit of each quarter, it should be verified that the grand total for each tax type aligns with the total annual payments remitted to the agencies. If the employee detail that reflects year-to-date amounts shows that a total of $100,000 was withheld from employee checks, then this figure should match what was sent to the IRS for the same time frame.
Finding out after the fact that Form 941 does not coincide exactly with Form W-2 should be avoided. If an employer fails to catch discrepancies, the IRS will eventually find it since standard IRS procedure is to make sure W-2s and 941s reflect the same gross figures. It may take the IRS several months to a year or more after the tax year is over to catch a discrepancy, but it will occur eventually.
There are three primary reports that employers should track at all times. Third-party payroll providers will typically provide all three of these reports automatically, but employers should manually track the relevant figures whether the reports are generated automatically or not.
The first report is typically known as a payroll register. At a minimum, the payroll register should be a recitation of all checks, direct deposits, and other transactions completed for a given payroll. There should also be a totals page that lists grand totals for all wages, taxes, and deductions that occurred on that particular payroll. Often, subtotals are calculated based on department or location.
The second major report is often referred to as a master control. This report is a listing of all relevant year-to-date and quarter-to-date amounts that have accumulated for the year. The report is basically a summation of what has occurred within the quarter or year for each earnings, tax, or deduction type. The grand total of all payroll register totals year-to-date should match up to the master control exactly.
The third report to consult can go by many names, but it is the quarterly summary of all important wages and taxes paid for the year. At a minimum, this report should list gross pay, the taxable amounts for federal income, Social Security, Medicare, Federal Unemployment Insurance Tax, and state and local tax information. This should be detailed by employee and grand totals as well.
If done correctly, these reports should all coincide neatly. For example, the quarterly wage and tax register for the first quarter should match the last master control for that quarter exactly (since the quarter-to-dates and year-to-dates would all match at that point). Figures do need to be tracked by quarter and by year since some IRS filings requires data only for the quarter (e.g., Form 941) whereas others track for the whole year (e.g., Form W-2).
Reporting Nonemployee Payments
In addition to reporting compensation paid to employees, employers also must report to the IRS payments made to nonemployees, such as independent contractors, for services performed, and payments made to retirees from pension plans, among other types of payments. Most such payments are reported annually on the 1099 series forms. The two most common are the 1099-MISC, Statement for Recipients of Miscellaneous Income, and the 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. See IRS Form 1099-MISC, Miscellaneous Income and IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc..
Cash payments of $600 or more to independent contractors for services rendered must be reported on Form 1099-MISC. A few examples of the other types of payments reported on Form 1099-MISC are those made for fees, commissions, prizes and awards to nonemployees if $600 or more, payments to certain health care service providers totaling $600 or more in a year, death benefits paid to an estate or beneficiary from certain types of plans, payments of gross proceeds to attorneys totaling $600 or more in a year, royalty payments and amounts deferred by nonemployees to certain nonqualified deferred compensation plans. More information is provided in the instructions to Form 1099-MISC.
Employers that make either periodic or lump sum distributions of retirement income must annually report the amounts and any federal income tax withheld from those payments on Form 1099-R. Death benefit payments must also be reported if they are paid as part of a qualified pension, profit sharing or retirement plan. More information is provided in the instructions to Form 1099-R.
Truncated TINs Permitted
Final IRS regulations permit the use of a Truncated Taxpayer Identification Number (TTIN) on payee statements and certain other documents instead of a taxpayer's Social Security Number (SSN), Individual Taxpayer Identification Number (ITIN), Adoption Taxpayer Identification Number (ATIN) or Employer Identification Number (EIN). The regulations are generally effective for payee statements due after December 31, 2014.
A TTIN displays only the last four digits of an individual's identifying number and is shown in the format XXX-XX-1234 or ***-**-1234. The final regulations affect those who issue or receive any federal tax-related payee statements and other documents required to be provided to payees and other individuals.
For example, a payee may be the recipient of a payment (e.g., an independent contractor who receives Copy B of Form 1099-MISC, Miscellaneous Income), a pension plan participant receiving distributions from a former employer (e.g., Copy B of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.), or an employee receiving qualified tuition payments from an employer (e.g., Copy B of Form 1098-T, Tuition Statement).
The final regulations implement two IRS pilot programs that allowed filers to use TTINs on Forms 1098, 1099 and 5498. The pilot programs were developed to prevent identity theft stemming from including a taxpayer's entire identifying number on payee statements provided on paper or electronically. After the pilots concluded, the IRS issued proposed regulationsestablishing TTINs and providing guidelines for their use. Affected filers were permitted to rely on the proposed regulations before they were published as final.
The final regulations adopt the proposed regulations with certain changes. While the proposed regulations permitted the use of a TTIN only with affirmative IRS authorization, the final regulations permit their use on any federal tax-related payee statement or other document required to be furnished to another person unless:
- Prohibited by statute, Internal Revenue Code (IRC) regulation or other guidance published in the Internal Revenue Bulletin (IRB), a federal form or instructions; or
- A statute, regulation or other guidance published in the IRB, a federal form or instructions requiring use of an SSN, ITIN, ATIN or EIN.
This change allows for the expanded use of TTINs without the IRS being administratively burdened with tracking every authorized use.
However, because taxpayer identifying numbers must be included in their entirety on returns and statements filed with the IRS, so that it may determine compliance and validate the information provided, TTINs may not be used.
- On returns or statements required to be filed with, or provided to, the IRS; and
- On any tax form, statement or other document that one individual provides to another.
For example, an employer may not use a TTIN in place of its EIN or, until further notice, an employee's SSN on the payee copy of federal Form W-2, Wage and Tax Statement, that it provides to an employee. The IRC requires Forms W-2 provided to employees to show the name of the employee and the employee's Social Security Number. Similarly, an individual may not use a TTIN in place of his or her TIN on a Form W-9, Request for Taxpayer Identification Number and Certification.
The final regulations also clarify that using a TTIN as the regulations permit will not result in a penalty assessment for failure to include a taxpayer identifying number on a payee statement or other document (e.g., a penalty under IRC § 6722 for failure to timely furnish a correct statement).
Penalties for Failure to Properly File Information Returns
An employer may be subject to penalties for failing to file information returns (Forms W-2, W-3 and 1099s) with the IRS or SSA on time or for filing them with incomplete or incorrect information. These amounts are inflation-adjusted annually under the Trade Preferences Extension Act of 2015. +114 P.L. 27.
The following are the inflation-adjusted penalty amounts for failure to file 2016 information returns with the IRS in 2017:
- $50 for each return filed or corrected within 30 days after the due date, up to a maximum penalty of $536,000 a year for large employers or $187,500 for small employers.
- $100 for each return filed or corrected more than 30 days after the due date but by August 1 of the year the return is due, up to a maximum penalty of $1,609,000 a year for large employers and $536,000 a year for small employers.
- $260 for each return filed or corrected later than August 1, up to a maximum penalty of $3,218,500 for large employers and $1,072,500 for small employers.
- $530 or 10% (per return) of the correct amount of tax required to be shown on the return, whichever is greater, with no maximum, if the employer willfully and intentionally disregarded filing requirements.
+Rev. Proc. 2016-55, 2016-45 IRB LEXIS 707.
The IRS defines small employers as those having $5 million or less of average annual gross receipts for the three most recent tax years. +I.R.C. § 6721.
The IRS will not impose penalties for returns filed on time but containing incomplete or incorrect information, so long as they are corrected by August 1. This exception only applies for up to 10 returns, or 0.5% of the total number of returns the employer is required to file in the year, whichever is greater. If more than this small number of returns is corrected, the lowest penalty listed above applies. +I.R.C. § 6721.
Employers are not penalized at all for inconsequential errors (e.g., errors that do not interfere with the processing of the return). In addition, no penalties apply if the employer can prove it had reasonable cause for failing to file or to include the correct or complete information on the return. +I.R.C. § 6724.
Safe harbor for de minimis errors. For Forms W-2 and 1099-series forms that are required to be filed after December 31, 2016, the PATH Act provides a safe harbor from the penalty for failure to file correct information returns. It applies if the forms filed contain de minimis errors but are otherwise correct. An error is de minimis if it is not more than $100 for any single amount reported. A lower threshold of $25 applies to errors made in the reporting of an amount of withholding or backup withholding.
Under the safe harbor, an employer or payer is not required to provide a corrected form to an employee or independent contractor. However, if an employee or independent contractor requests a corrected Form W-2 or 1099, the employer or payer must provide it and the penalty for failure to file a correct information return continues to apply.
[LexisNexis: "114 P.L. 113].
IRS Notice 2017-09 clarifies that the de minimis safe harbor does not apply if an employer or payer:
- Makes an intentional error on a Form W-2 or 1099, even if the error falls within the range of de minimis amounts;
- Fails to provide a form to an employee or independent contractor; or
- Fails to file a form with the SSA or IRS.
According to the Notice, an employee or independent contractor who receives an incorrect form may elect out of the safe harbor and request to be provided with a corrected form that is accurate, by following the employer or payer's reasonable procedure for making such elections.
The Notice requires an employer or payer to set up a reasonable procedure that will enable employees or independent contractors to make an election. Employers or payers must notify employees and independent contractors of this procedure. A procedure is considered reasonable if it:
- Requires employees or independent contractors to provide the election in writing, online or by telephone (however, online must not be the only option); and
- Does not impose any other prerequisites, conditions or time limits for making an election.
An employer or payer that fails to designate a reasonable procedure must accept an employee's or independent contractor's written election if it was sent to the address on the information return.
Employees' or independent contractors' elections may apply to forms they receive in the current year and/or to all forms they will receive in subsequent years. They are also entitled to revoke them at any time by providing the employer or payer with written notification. A revocation should specify the forms to which it applies.
An employee or independent contractor must clearly state his or her intention to make an election. In addition, the election request must include the following information:
- The employee's or independent contractor's name, address and Taxpayer Identification Number;
- The type of statement to which the election applies (i.e., Form W-2 or 1099-MISC); and
- The duration of the election (i.e., whether it applies to the current year or indefinitely).
If an employee or independent contractor does not identify the type of statement or the calendar year to which the election relates, the employer or payer must treat the election as applying to all statements it is required to provide during the current and all succeeding years.
An employer or payer must retain an election for at least as long as it retains the related information returns. An employer or payer that furnishes a corrected form to an employee or independent contractor and files the corrected form with the SSA or IRS within 30 days of the date of the election will be treated as having established reasonable cause and will not be subject to tax penalties.
Penalties for Failure to Provide Forms W-2 or 1099
The penalty structure and exceptions applicable to failure to provide information statements (Forms W-2 and 1099-series forms) to employees is similar to those applicable to failure to properly file information returns. See Penalties for Failure to Properly File Information Returns. These amounts are also inflation-adjusted annually under the Trade Preferences Extension Act of 2015. +114 P.L. 27.
The following penalty amounts apply if an employer fails to provide employees or other payees with tax year 2016 information returns in 2017:
- $50 for each return filed or corrected within 30 days after the due date, up to a maximum penalty of $536,000 a year for large employers or $187,500 for small employers.
- $100 for each return filed or corrected more than 30 days after the due date but by August 1 of the year the return is due, up to a maximum penalty of $1,609,000 a year for large employers and $536,000 a year for small employers.
- $260 for each return filed or corrected later than August 1, up to a maximum penalty of $3,218,500 for large employers and $1,072,500 for small employers.
- $530 or 10% (per return) of the correct amount of tax required to be shown on the return, whichever is greater, with no maximum, if the employer willfully and intentionally disregarded filing requirements.
+Rev. Proc. 2016-55, 2016-45 IRB LEXIS 707.
The IRS defines a small employer as one that has $5 million or less of average annual gross receipts for the three most recent tax years. +I.R.C. § 6721.
Employers will not be penalized for errors made on a small number of information statements, or for inconsequential errors or omissions made on an information statement (e.g., errors that would not prevent an employee from receiving the information in time in order to file their personal income tax return). +I.R.C. § 6722.
In addition, no penalties will apply if an employer can prove it had reasonable cause for failing to provide correct and timely statements. +I.R.C. § 6724.
Safe-harbor for de minimis errors. For Forms W-2 and 1099 required to be filed after December 31, 2016, the PATH Act provides a safe harbor from the penalty for failure to provide employees or independent contractors with correct forms, if the forms filed contain de minimis errors but are otherwise correct.
An error is de minimis if it does not exceed $100 for any single amount reported. A lower threshold of $25 applies to errors in the reporting of an amount of withholding or backup withholding.
If an employee or independent contractor requests a corrected Form W-2 or 1099, the penalty for failure to provide a correct information return continues to apply.
Electronic Filing Requirements for Forms W-2, 1095-C and 1099
Employers that file 250 or more Forms W-2, Wage and Tax Statement, (Copy A) must file them electronically (this also applies to W-2s filed for employees in Puerto Rico, the US Virgin Islands, Guam, and American Samoa). See Form W-2 Reporting.
The threshold of 250 refers to the number of W-2s filed at the end of the year, not to the number of active employees at the time the forms must be filed. For example, if Acme Widget Corporation has 225 employees when Forms W-2 must be filed, but 50 additional employees left employment during the year, Acme must file 275 W-2s. Therefore, Acme must file them electronically. The threshold also applies to each of these forms separately, not to the total of all of them. Employers that do not meet the threshold may file electronically on a voluntary basis.
Electronic filers can check the correctness of their Form W-2 and Form W-2c reports before submitting them to the SSA for processing by downloading free SSA software applications called AccuWage and AccuW2C. The software reads an employer's file and informs the employer of any errors detected including the most common, but not all, format errors in wage submissions. Both of the current software programs, and a Help Guide, are available for download on the SSA's AccuWage page.
Employers that do not have the technological or financial ability to file electronically despite meeting the 250 form threshold can apply to the IRS for a hardship waiver on IRS Form 8508, Request for Waiver from Filing Information Returns Electronically, at least 45 days before the due date of the return. Waivers must be applied for annually.
Electronic Filing Methods
Employers that are required to file Forms W-2 electronically must do so over the internet via the SSA's Business Services Online (BSO). Forms may be filed online using this service for each tax year from mid-December through March 31. Beginning with forms filed in 2017, the electronic filing deadline is January 31. Reports that are being resubmitted may be filed on BSO at any time. Employers must register to use BSO before using it for the first time. For full details employers may download the SSA BSO Handbook.
The SSA also allows small employers to complete up to 50 Forms W-2 and W-3 online and submit them via BSO. Up to 50 forms may be submitted at a time and there is no limit on the number of sessions. Similar accommodations are available for small numbers of Forms W-2c and W-3c. See Correction Forms W-2c and W-3c.
In addition to BSO, the SSA's National Computer Center provides a dedicated line for filing Forms W-2 using Electronic Data Transfer (EDT). More information is available from the SSA by calling 800-772-6270, from 7:00 a.m. - 7:00 p.m., ET, Monday - Friday.
Electronic Filing Specifications
Electronic filing specifications for Forms W-2 are found in SSA Publication 42-007, Specifications for Filing Forms W-2 Electronically (EFW2). The specification for Forms W-2c are found in SSA Publication 42-014, Specifications for Filing Forms W-2c Electronically (EFW2C). Both forms are available on the SSA website. Note that all states that require or accept electronically filed Form W-2 information accept files formatted to these specifications. See State Requirements
Employers that do not file Forms W-2 electronically even though they are required to do so are subject to the same penalties that apply to failure to file a return, even if the employer files the paper versions of the returns on time. See Penalties for Failure to Properly File Information Returns. However, the penalty for failure to file only begins to apply after the 250th return.
For example, if an employer files 1,000 Forms W-2 using the paper version of the form rather than electronically, the per-form penalty would apply to forms 250 through 1,000. No penalties would apply to forms one through 249.
If electronic W-2s are filed late, the amount of the penalty depends on when the information is received by the SSA. If a return is received by the SSA on time but it cannot be processed because it contains errors or is missing information, the employer has 45 days to correct it and resubmit it to the SSA. No penalty will be imposed so long as the employer resubmits it within the 45 days.
The filing rules for Form 1095-C are the same as the filing rules for Forms W-2, except that Forms 1095-C are filed with the IRS, and not the SSA. Employers filing electronically (i.e., employers filing at least 250 Forms 1095-C) file through the IRS's Affordable Care Act Information Return (AIR) System.
Since the AIR system is dedicated to accepting only Forms 1095 and 1094, an employer must separately register to use it, even if the employer is already registered with the IRS to use another electronic filing method. An employer can register to use the AIR system at the IRS's Registration Services web page.
The deadline for filing electronically is March 31.
Employers that file 250 or more of any one type of Form 1099 are required to do so electronically via the IRS's Filing Information Returns Electronically (FIRE) system. Approval to use FIRE must be obtained first by filing Form 4419, Application for Filing Information Returns Electronically (FIRE), with the IRS at least 45 days before the return is due. Employers can find detailed instructions in IRS Publication 1220, Specifications for Filing Forms 1097-BTC, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G Electronically. See Reporting Nonemployee Payments.
Beginning with Forms 1099-MISC filed in 2017, on which nonemployee compensation is reported in Box 7, the filing deadline is January 31.
Electronic Filing of Forms 940, 941, and 944
Employers may electronically file (by the same due dates as the paper forms) the following forms using the Employment Tax e-File System:
- Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return;
- Form 941, Employer's Quarterly Federal Tax Return (and Schedules B and D); and
- Form 944, Employer's Annual Federal Tax Return (and Schedules B and Schedule D).
Advantages of the system are that Forms 940 and 941 can be transmitted in one file, feedback on whether forms have been received is instantaneous, potential errors are immediately identified, certain filers can submit payments along with the returns, and a PIN issued by the IRS is used in place of a signature. See Unemployment Insurance Tax (FUTA): Federal; Small Employer Exception.
Employers that want to use the service must register for e-services on the IRS website, and then complete the online application titled Application to Participate in the IRS e-file Program. Applications are due quarterly by specific dates, as noted in the application. Notification of acceptance or rejection of the application takes about 45 days from the date it is submitted.
State Electronic and Magnetic Media Form W-2 Reporting Requirements
Although information returns submitted on magnetic media are no longer accepted by the SSA, in many states employers must file information returns either electronically or on magnetic media. The various types of magnetic media include tapes, cartridges, diskettes and CDs. However, fewer and fewer states are accepting magnetic media submissions. Because individual state requirements vary widely, employers should check the rules of the states in which they operate to ensure compliance. See State Requirements; Form W-2 Electronic Filing Requirements by State.
Reporting Special Wage Payments to the SSA
Special wage payments (SWPs) are payments made to current or former employees for amounts earned in one year but paid in a subsequent year. Employers need to notify the SSA about SWPs because of the effect they have on Social Security benefits received by those under age 65.
For these individuals, when SWPs are included in earned income, the amount of their monthly benefits will be reduced. This is because the monthly benefit amount for such individuals depends on the amount of their earned income, and benefits are reduced when earned income is above a certain limit.
Wages paid in one year but earned in a previous year are not counted towards this earnings limit. Starting at age 65, there is no earnings limit.
A few common types of SWPs include:
- Severance pay;
- Unused vacation or sick pay;
- Back pay;
- Stock options; and
- Retirement or deferred compensation payments reported on Form W-2 in one year but earned in a previous year.
SWPs must generally be reported by employers on Form W-2 in the year they are received by the employee. Employers also must report to the SSA any SWPs made in a year to fully retired employees and employees who are collecting social security benefits but are still working. Reports are not required for employees under age 62. Reports must be filed with the SSA by April 1.
SWP Reporting Methods
Employers may report SWPs in one of four ways:
- Electronic reporting using SSA's BSO (See Electronic Filing Methods);
- Paper listing if SWPs are being reported for several employees; and
- Form SSA-131, Employer Report of Special Wage Payments (only one employee may be reported per form). The form itemizes when specific amounts were earned and the payment types so that the SSA will know which year(s) to apply the earnings to. This will prevent a lump sum payment from counting against the individual's earnings all in a single year. Form SSA-131 is included in IRS Publication 957.
Employee consents used to support FICA tax overpayment refund claims. The IRS issued a proposed Revenue Procedure (Rev. Proc.) that provides employer guidance on employee consents used to support FICA tax overpayment refund claims, excluding overpayments of Additional Medicare Tax. The guidance was issued in response to questions regarding what information employers must provide in employee consents and whether employers may request, provide and retain employee consents in an electronic format.
Employers are not required to solicit new employee consents for those requested before the proposed Rev. Proc. is published as final in the Internal Revenue Bulletin. However, employers are permitted to rely on the proposed Rev. Proc. for employee consents requested before the date the final Rev. Proc. is published.
Under Internal Revenue Code § 6402, before the IRS will process an employer's claim, the employer must make a reasonable attempt to protect an employee's interest in any employee share of a refund or adjustment from the IRS for the employer's overpayment of prior-year FICA tax withheld from the employee's pay. Generally, the employer must certify to the IRS that it has either:
- Repaid or reimbursed the employee; or
- Secured the employee's written consent to the allowance of the refund or credit.
This confirms that the employee has not made a separate claim for refund or credit, or had such a claim rejected, and will not make a future claim for refund or credit of the amount the employer overwithheld. In general, employers may request a written consent on paper or in an electronic format.
The proposed Rev. Proc. clarifies that, in addition to providing an employee's name, address and taxpayer identification number, a valid employee consent must identify the basis of the claim for refund and be signed by the employee under penalties of perjury. The proposed Rev. Proc. also details what constitutes "reasonable efforts" to secure an employee consent when an employer is unable to obtain one.
The guidelines permit, but do not require, employers to request, provide and retain employee consents in an electronic format, as an alternative to a paper format. The guidelines also allow employers to retain in electronic format requests and consents submitted on paper. Electronic system requirements are detailed in the proposed guidelines.
The following states have additional requirements for this topic under applicable state law.
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