By popular request, the following are the Form W-2 most frequently asked questions (FAQs) posed to our Ernst & Young LLP payroll and employment tax professionals for tax year 2014.
FAQ 1 Is there a dollar threshold at which Forms W-2 are not required?
FAQ 2 What are the corrective steps if it is discovered at the close of 2014 that an employee contributed too much to the qualified retirement plan (e.g., 401(k))?
FAQ 3 How are employer and employee Health Savings Account (HSAs) reported on the Form W-2?
FAQ 4 Is supplemental group-term life insurance taxable to employees if they pay 100% of the monthly premium?
FAQ 5 Are we required to report wages and benefits made available to terminated or retired employees on Form W-2 or Form 1099?
FAQ 6 If we withheld too little FICA tax for the year, can we deduct the difference from federal income tax withholding for Form W-2 and Form 941 reporting purposes?
FAQ 7 Can we charge employees for replacement Forms W-2/W-2c?
FAQ 8 Can we report in box 2, federal income tax withheld, amounts employees paid to us by personal check?
FAQ 9 What are the reporting requirements for taxes we paid on behalf of our employees in 2015 pursuant to a 2014 wage payment?
FAQ 10 What do we do if employees do not yet have their Social Security numbers at the time we are required to issue or file Forms W-2?
For more information, or if you require any additional assistance with year-end reporting, write to Debera Salam at firstname.lastname@example.org or Thomas Meyerer at email@example.com.
Is there a dollar threshold at which Forms W-2 are not required?
Facts. We have a large number of seasonal, part-time employees. A significant number of them received wages of less than $100 in 2014. Do we have to issue Forms W-2 for small dollar amounts?
Answer. There is no de minimis exemption from the requirement to file Forms W-2. The IRS states that “employers must file a Form W-2 for wages paid to each employee from whom: (1) income, Social Security, or Medicare taxes were withheld, or (2) income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate.
In addition, every employer engaged in a trade or business that pays remuneration for services performed by an employee, including noncash payments, must furnish a Form W-2 to each employee even if the employee is related to the employer.” (IRC Reg. §31.6051-1; Form W-2 reporting instructions (rev. 2014).)
What are the corrective steps if it is discovered at the close of 2014 that an employee contributed too much to the qualified retirement plan (e.g., 401(k))?
Facts. We discovered in the process of preparing our 2014 Forms W-2 that some employees contributed to the 401(k) plan on a pretax basis in excess of $17,500 in 2014. What steps do we take now to correct this error?
Answer. Excess pretax contributions to a qualified retirement plan discovered after the close of the tax year cannot be adjusted using Form W-2 or W-2c. Instead, the plan is required to refund the excess to the employee.
It is not unusual for some employees to have made excess pretax contributions (i.e., elective deferrals) to a qualified IRC §401(k), §403(b) or §457(b) plan, either because of contributions made under the plans of other employers in a tax year or because of a payroll system or other error of the employer.
The employee is responsible for communicating information regarding excess deferrals so that a corrective distribution can be made by the deadline of the first April 15 following the close of the individual’s tax year. (Reg.§1.402(g)-1(e)(2)(i).) The plan administrator will issue a Form 1099-R for the deferral year to report the amount of the excess deferral that is taxable in the deferral year. The plan administrator will issue a second Form 1099-R for the distribution year to report the amount of earnings being distributed.
If the corrective distribution of the excess deferral is not made on or before April 15 following the end of the employee’s tax year in which the deferral occurred, then the excess deferral generally may not be paid out as a corrective distribution. Rather, the excess deferral is “trapped” in the tax-qualified plan until a distributable event permitted under IRC §401(k)(2)(B) (and in accordance with the written terms of the plan).
The effective penalty to the employee for failing to communicate the excess deferral to the employer in time to allow for a timely correction on or before April 15 following the end of the employee’s tax year in which the deferral occurred is that the employee will be taxed twice on the amount: (i) the excess deferral amount is subject to taxation for the year of deferral (because it was an invalid deferral) and (ii) the excess deferral amount will be subject to income taxation a second time for the year in which the amount is distributed from the tax‑qualified retirement plan. (Reg. §1.402(g) 1(a) and -1(e)(8)(iii).)
Treasury regulations and other guidance set forth explicit instructions for making corrective distributions and reporting those distributions on information returns/statements. Failure to comply with these guidelines can have consequences for the employer, the employee and/or the plan itself.
How are employer and employee Health Savings Account (HSA) contributions reported on the Form W-2?
Facts. Our employees had the choice in 2014 of participating in one of two health insurance plans, one with a low deductible of $250 or another with a high deductible of $2,500 for family or $1,250 for self only. The latter is a qualified HSA under which employees may elect to contribute up to $2,300 per year on a pretax basis with employer matching contributions of up to $1,000 per year.
How are the HSA contributions reported on the 2014 Form W-2?
Answer. An employer’s contribution to an HSA is excluded from wages subject to federal income tax (FIT), federal income tax withholding (FITW) and Social Security/Medicare (FICA) if is reasonable to believe it can be excluded from the employee’s gross income at the time made. Employee pretax contributions to the HSA are also excluded from wages subject to FIT, FITW and FICA.
Since the total annual employer and employee contributions to the HSA don’t exceed the annual limits (see below), they are not required to be reported on Form W-2, boxes 1, 3 or 5.
On the other hand, both employer contributions and employee pretax contributions are required to be reported in Form W-2, code W. For example, if the employer’s 2014 contribution was $1,000 and the employee’s 2014 pretax contribution was $2,300, a total of $3,300 is reported in Form W-2, box 12, code W.
Health Savings Account (HSA) limits for 2014 and 2015
|Health Savings Account limit type
|Deductible (high-deductible health plan)
For key federal and state rates and limits for 2014 and 2015 see our year-end landing page.
Watch this! Incorrect reporting of HSA contributions in Form W-2, box 12, code W can prevent employees from filing correct federal, state and local income tax returns because employees rely on Code W to complete IRS Form 8889, which is attached to the federal individual income tax return. Errors in reporting amounts in Form W-2, box 12, code W should be corrected immediately.
Is supplemental group-term life insurance taxable to employees if they pay 100% of the monthly premium?
Watch this! Note that employers may aggregate the basic and supplemental group-term life plans for purposes of determining the excess benefit over $50,000. When aggregating the policies, employers and employees may gain a tax advantage because the employee’s after-tax contributions for the supplemental policy may reduce the imputed income that may have otherwise applied to the basic policy.
Facts. We provide at no cost to our employees a basic group-term life insurance policy with death benefits of up to two times their annual salary. Employees may also purchase supplemental group-term life insurance. Because there are employer contributions for the basic policy but no employer contributions for the supplemental policy, we compute imputed income for the basic policy using IRS Uniform Premium Table 1, but we report no imputed income for the supplemental policy.
Is this correct?
Answer. You may be understating employees’ taxable income because the IRS may require that you use Premium Table I to determine the “cost” of the supplemental group-term life insurance, just as you do for the basic group-term life policy.
In 1964, when Congress enacted the law governing the taxation of group-term life insurance (IRC §79), it made clear that employees should be taxed not only on the value of group-term life insurance that is funded by employers, but also in those instances in which the employee’s cost for the life insurance premium is subsidized.
Congress had two types of subsidies in mind:
- The employer negotiates for lower premiums under the supplemental plan in consideration of the premiums paid under the employer-funded plan.
- The overall premiums collected by the insurance company aren’t “discounted,” but certain (i.e., younger) employees are charged a bit more for their premiums so that the premiums of other (i.e., older) employees are less.
In keeping with the intent of Congress, Treasury regulations state that if group-term life insurance is carried directly or indirectly by the employer, Uniform Premium Table I must be used to determine the value of the group-term life insurance. A policy is carried directly or indirectly under the following two circumstances:
- Employee premiums for supplemental insurance are discounted because the employer purchased the basic life insurance coverage from the same provider.
- At least one employee pays less and one employee pays more than the rates as provided in IRS Uniform Premium Table I. (§1.79-0(b). [re Carried directly or indirectly])
To determine if imputed income applies to the supplemental group-term life insurance policy, you will need to compare what each employee pays for the insurance against the value of that insurance under IRS Uniform Premium Table I. If at least one employee’s contribution is less, or one employee’s contribution is more than the Uniform Premium Table 1 value, you will need to perform the imputed income calculation routine for all employees, just as you do for the basic group-term life insurance.
Are we required to report wages and benefits made available to terminated or retired employees on Form W-2 or Form 1099?
Facts. We paid sign-on bonuses, taxable relocation expenses, group-term life insurance and other incentives this year to retired employees and to individuals who terminated their employment prior to their first day of work. We intend to report these taxable amounts on a Form 1099-MISC because these individuals never performed services for us. Is this correct?
Answer. Amounts paid to individuals in anticipation of employment, such as sign-on bonuses or taxable relocation reimbursements, are wages subject to FIT, FITW, FICA and FUTA, and as such are reported on Form W-2, not Form 1099. Similarly, wages and taxable benefits provided to former employees, such as taxable group-term life insurance provided to retirees, are reported on Form W-2 and not Form 1099.
Generally, amounts treated as wages are reported on Form W-2 regardless of the status of the employment relationship (pre-employment, retired, laid off) at the time the payments are made or benefits provided. Note that if Social Security and Medicare tax were not withheld from a former employee’s taxable group-term life insurance, the amount not withheld is shown in box 12 of Form W-2 using codes M and N, respectively. (TAM 9718001; IRC Reg. §§31.3121(a)-1(i), 31.340(a)-1(a)(5); Rev. Rul. 78-176, 1978‑1 CB 303; Rev. Rul. 2004-109, 2004-50 IRB 958.)
Also see FAQ 4.
If we withheld too little FICA tax during the year, can we deduct the difference from federal income tax withholding for Form W-2 and Form 941 reporting purposes?
Facts. In the process of reconciling our Form W-2 files, we discovered that we did not withhold sufficient Social Security and Medicare (FICA) taxes from the wages of some of our employees. We are considering deducting FICA taxes owed from employees’ federal income tax withholding and then reflecting the adjustment to FICA and FITW on the fourth-quarter Form 941 so that the amounts on Forms W-2 and 941 agree. Is this allowed under the federal tax regulations, and if not, what is the risk?
Answer. It is a risky practice to rob from federal income tax to pay FICA. The tax regulations establish two separate requirements for the withholding of federal income tax and FICA tax. Additionally, employers are separately liable for the employer’s share of FICA taxes.
Should the IRS audit the withholding tax records and discover that you made this transfer between federal income tax and FICA withholding, it will find that you have not complied with the requirements to correctly withhold employee FICA taxes under IRC §3102(a), to correctly withhold federal income tax under IRC §3402(a) or to pay at the correct employer FICA rate under IRC §3111. Consequently, the IRS can hold you personally liable for the FICA and FITW shortages (IRC §§3102(b), 3111 and 3301), plus interest and penalties.
Can we charge employees for replacement Forms W-2/W-2c?
Facts. We have a few employees who consistently lose their Forms W-2/W-2c each calendar year. To discourage requests for replacement forms, we are considering charging a fee, such as $5 or $10 per replacement, through payroll deduction. Are there any laws restricting us from charging these fees?
Answer. The IRS does not prohibit the assessment of fees for the replacement of information statements (e.g., Forms W-2, 1099), but there may be restrictions under other laws. For instance, employers should be cautious of collecting such fees from workers earning the minimum wage because certain deductions that bring wages below the federal minimum are prohibited under federal (and some state) wage-hour laws. (Instructions for Forms W-2 and W-3, rev. 2014; 29 CFR §531.37.)
Can we report in box 2, federal income tax withheld, amounts employees paid to us by personal check?
Facts. A number of our employees gave us personal checks requesting that we deposit these amounts with the IRS and report the payments as federal income tax withheld on the 2014 Form W-2. Is this allowed, and if not, what is our risk?
Answer. It depends on the circumstances. If the employee is writing a personal check to cover the federal income tax withholding on a taxable noncash fringe benefit, and the check is given to you at the time the withholding obligation is incurred, the IRS would likely have no issue with this practice. (IRC Reg. §31.6205-1.)
If, on the other hand, the employee is giving you a check to cover federal income tax payment shortages that accumulated throughout the year, accepting the personal check could put the employer at risk.
The IRC requires that federal income tax liabilities be paid throughout the year, not all at once at the end of the year. Hence, an employee’s options for paying the current year’s federal income tax liability are (1) federal income tax withholding based on the Form W-4 and/or (2) quarterly estimated tax payments. In order to avoid an estimated tax penalty, individual taxpayers generally must pay in 90% of their current-year federal income tax liability or 100% of their prior year’s federal income tax liability by the end of the calendar year through withholding and/or estimated tax payments (the final estimated tax payment generally is due on January 15 of the subsequent year). (IRC §6654(d)(1)(B) and (C).) Thus, in the case of an individual who has income from which tax is withheld (i.e., wages) and income from which tax has not been withheld (e.g., dividends, bank interest), penalties can be avoided by increasing federal income tax withholding based on the Form W-4 and/or by making quarterly estimated tax payments.
Supporting the intent of the law is a statement in Publication 15, Circular E, Employer’s Tax Guide, rev. 2014, instructing employers not to “accept any withholding or estimated tax payments from employees in addition to withholding based on their Form W-4.” In other words, the IRS instructs employers that they should not accept personal checks from employees, the purpose of which is to assist employees in evading IRS late-payment penalties.
In determining sanctions that could be imposed on employers that help employees avoid the penalty for failure to pay their federal income tax liability throughout the year, the IRS would likely rely on IRC §7206. IRC §7206 provides that any taxpayer who “willfully makes and subscribes any return, statement, or other document … which he does not believe to be true and correct as to every material matter” shall be guilty of a felony. If convicted of falsifying the amount of federal income tax withheld to help employees evade penalties, companies face a fine of up to $500,000 ($100,000 in the case of individual employers), up to three years’ imprisonment or both, plus the costs of prosecution.
There is some indication that the IRS would probably also rely on IRC §6701 and §7201. The extent to which the IRS would be successful in imposing these additional sanctions is arguable, but they are worth considering:
- IRC §6701. This section applies to anyone who aids or assists in preparing a return understating a tax liability. The penalty is $1,000 or, in the case of a return relating to the liability of a corporation, $10,000. Whether this provision can be stretched to apply to the evasion of the estimated tax penalty may be questionable.
- IRC §7201. This section imposes a sanction against “any person who willfully attempts in any manner to evade or defeat any tax imposed” by the IRC. Such person is guilty of a felony and, upon conviction, subject to a fine of not more than $100,000 ($500,000 in the case of a corporation), imprisonment of up to five years or both, plus the costs of prosecution. Whether this provision applies to the estimated tax penalty may be questionable.
Regardless of whether a business accepts personal checks for federal income tax withholding, employees should be notified that the business will not accept personal checks to remedy federal income tax withholding shortfalls throughout the year. This notification should inform employees to adjust the Form W-4 and/or make estimated federal income tax payments. Copies of your organization’s policy against accepting personal checks for federal income tax withholding shortages can be distributed with the 2014 Forms W-2 or mailed separately together with a blank 2015 Form W-4.
What are the reporting requirements for taxes we paid on behalf of our employees in 2015 pursuant to a 2014 wage payment?
Facts. We discovered early in 2015 that we neglected to report certain taxable fringe benefits on the 2014 Form W-2. We issued Forms W-2c for 2014 and paid the federal income, Social Security and Medicare taxes on the employees’ behalf and reflected those withholdings on the 2014 Form W-2c. We understand that a gross‑up is required. Should we have reported the gross-up on the 2014 Form W-2c, or is it included on the 2015 Form W-2?
Answer. Before we address your specific question about the gross‑up, we emphasize that you cannot correct an underwithholding of federal income tax after the close of the tax year, unless the income tax underwithholding was due to an administrative error. (See IRS Publication 15, Sec. 13, Prior Period Adjustments — Income Tax Withholding Adjustments.) An example of an administrative error is when the employer withholds income tax but fails to remit it to the IRS. There is also an administrative error if the employer has an agreement to pay the employee’s federal taxes but fails to do so.
In the current situation, you discovered that you did not report taxable fringe benefits that were subject to federal withholding. Based on the facts, this does not appear to have been an administrative error. You should have corrected the 2014 W-2 wage amounts by issuing Form W-2c and correcting the underwithheld FICA taxes, but you cannot correct the 2014 federal income tax withholding after the close of the tax year unless the error is an administrative error. If you provided employees the funds to pay the 2014 income tax related to the fringe benefits, the employees will have additional income in 2015, which will require a gross-up computation. If you pay the employees’ FICA tax, this will also require a gross-up computation in 2015.
As you correctly state, federal income withholding and FICA taxes paid on behalf of employees are subject to FITW and FICA. To address the pyramiding effect of the tax on the tax, the IRS prescribes a formula for arriving at the gross taxable amount or gross-up. (Rev. Rul. 58-113,1958-1 CB 362.) While there are a few variations on the gross-up methodology, we will demonstrate one gross-up method at right that is the easiest to understand.
Example 1. Assume that the employer pays the employee’s FITW (at 25%) and FICA on a taxable fringe benefit having a fair market value of $1,000 and that the employee has not and will not reach the Social Security wage limit for the calendar year. Here is the gross-up calculation:
1. 100% less 25% (federal income tax) less Social Security (6.2%) less Medicare (1.45%) = 67.35%
2. $1,000 (fringe benefit) divided by 67.35% (the result from step 1) = $1,484.78
3. To test:
FITW (25%)………………………………… $ 371.19
Social Security tax (6.2%)………………. $ 92.06
Medicare tax (1.45%)…………………….. $ 21.53
Net…………………………………………. $ 1,000.00 (original wage amount)
Under the facts as they were presented, the gross-up was done in 2015 pursuant to a 2014 wage payment. Under the rule of constructive receipt (IRC §451), the resulting increase in wages and taxes from the gross-up is required to be reflected in the year the gross-up occurred (under these facts, 2015).
|Example 2. Assume the same facts as Example 1 except that the gross-up was performed in 2015 pursuant to fringe benefits that will be reported on the 2014 Form W-2c.1. 2014 Form W-2c (additional wages and taxes):Box 1, federal taxable wages = $1,000Box 2, no entry because it is not an administrative adjustment (but employer pays employee’s 2013 federal income tax at 25% = $250)Box 3, Social Security wages = $1,000Box 4, Social Security tax withheld at 6.2% = $62Box 5, Medicare wages = $1,000Box 6, Medicare tax withheld at 1.45% = $14.50Total taxes paid on behalf of employee in 2015 for tax year 2014 = $326.50 ($250 + $62 + $14.50)100% less 25% (federal income tax) less Social Security (6.2%) less Medicare (1.45%) = 67.35%$326.50 (taxes paid for employee) divided by 67.35% = $484.782. 2015 Form W-2 (increase due to 2014 taxes paid on employee’s behalf in 2015)
| Report on 2015 Form W-2
||This amount Form W-2
|Box 1, federal taxable wages
|Box 2, federal income tax withheld
|Box 3, Social Security wages
|Box 4, Social Security tax withheld
|Box 5, Medicare tax wages
|Box 6, Medicare tax withheld
Proof: $484.78 = $326.50 plus taxes paid for employee ($121.19 + $30.06 + $7.03)
The gross-up is required to be reflected in the year the gross-up occurred (under these facts, 2015).
What do we do if employees do not yet have their Social Security Numbers at the time we are required to issue or file Forms W-2?
Facts. We employed a number of foreign workers in November 2014 who applied for their US Social Security cards at the time of hire. We have been told that their Social Security cards and Social Security Numbers (SSNs) will likely not be available by the due date for filing the 2014 Forms W-2. What should we report in Form W-2, box A? Will there be penalties for filing Forms W-2 with the Social Security Administration (SSA) without SSNs?
Answer. According to the 2014 Instructions for Forms W-2 and W-3, when filing on paper, the words “applied for” should be used when the SSN is not available. However, when filing electronically, the SSA instructs employers to enter zeroes in locations 3 to 11 of the RW record. When the SSN is provided, the employer should submit a Form W-2c showing the correct SSN. This Form W-2c is issued to the employee and filed with the SSA.
In Publication 1915, Understanding Your Individual Taxpayer Identification Number, the IRS states that it generally will not issue an Individual Taxpayer Identification Number (ITIN) to aliens who have met the SSA’s evidence requirements for work authorized under the immigration law but who are experiencing delays in securing an SSN caused by the SSA’s procedures. The IRS instructs employers in this case to keep documentation to show that the failure to supply a payee’s SSN was caused solely by the SSA’s procedures for issuing SSNs to aliens. (Note that the SSA routinely verifies the name and SSN as reported on Forms W-2; the SSA treats an ITIN that appears in box A of Form W-2 as an invalid SSN.)