Each year, employers have to send a report to employees showing their total wages and deductions, so they can include the information on their income tax returns. While keeping up with yearly tax law changes is complicated as it is, 2020 changes to Form W-2 reporting are another thing employers need to pay attention to.
Form W-2 Requirements
Form W-2, Wage and Tax Statement provides employees with information that has to be included in their income tax form. It also gives the Internal Revenue Service (IRS) and Social Security Administration (SSA) information to verify employees’ income tax returns.
Employers are obliged to prepare Form W-2 reporting for employees each year, showing their total gross earnings, Social Security earnings, Medicare earnings, and federal and state taxes withheld from employees.
Employees should receive Form W-2 on or before January 31 each year, or February 1 in 2021, so they have enough time to file their income taxes before the deadline, which is usually April 15. Also, by the end of January, employers need to file Form W-2, along with Form W-3, for each employee with the SSA, for the previous year. The SSA uses the information on these forms to calculate the Social Security benefits to which each worker is entitled.
COVID-19-Related Changes to Form W-2 Reporting
Apart from being responsible for Form W-2 reporting of employees’ annual wages and withheld taxes, employers might need to enter additional benefits like retirement plan earnings and third-party sick pay. However, 2020 was marked by the COVID-19 pandemic and, as a result, Congress enacted a number of emergency pieces of legislation to financially help both employers and employees. Therefore, in addition to other obligations, employers need to report the financial help employees received from the coronavirus legislation. To do this properly, they have to understand changes introduced to Form W-2 reporting.Use this comprehensive guide to understand your payroll tax obligations, maintain effective tax compliance, and reduce costs by avoiding penalties.
Paid Sick Leave and Family Leave
The Families First Coronavirus Response Act (FFCRA) required qualifying employers to provide paid sick and family leave to eligible employees between April 1, 2020, and December 31, 2020.
Under this Act, employees could receive paid leave in the following situations:
- 10 days of paid sick leave at the employee’s regular rate of pay for employees who were quarantined or isolated due to the coronavirus, up to a maximum daily rate of $511,
- 10 days of paid sick leave at two-thirds of the employee’s regular rate of pay for employees who were taking care of someone who was quarantined or isolated due to the coronavirus, up to a maximum daily rate of $200, and
- 10 weeks of paid family leave at two-thirds of the employee’s regular rate of pay for employees who were taking care of a child whose school or childcare center was closed, up to a maximum daily rate of $200.
Form W-2 reporting criteria for FFCRA leave include the following requirements:
- Box 1 shows all wages subject to federal income tax withholding,
- Box 3 shows all wages subject to Social Security tax withholding, up to the annual wage limit of $137,700 for 2020, and
- Box 5 shows all wages subject to Medicare tax withholding.
Employers also need to report the taxes withheld from the employee’s wages, including FFCRA leave wages:
- Box 2 shows federal income tax withheld,
- Box 4 shows Social Security tax withheld, and
- Box 6 shows Medicare tax withheld.
Finally, employers have to give employees certain information about their FFCRA leave wages and report this information in Box 14 of the employee’s Form W-2, or on a separate statement. In addition to this, they need to add a brief description.
Employee Social Security Deferral
On August 8, President Trump signed an executive order allowing employers to defer eligible employees’ Social Security tax obligations between September 1, 2020, and December 31, 2020. If any of the employees were eligible for and chose to defer Social Security tax, employers are responsible for collecting the deferred tax amount between January 1, 2021, and April 30, 2021, as well as applying changes to Form W-2 reporting.
According to the IRS, reporting deferred Social Security tax requires employers to fill out both Form W-2 and Form W-2c, and follow Form W-2 reporting requirements:
- Reporting the employee’s total wages subject to Social Security tax in box 3 or box 7,
- Not including any deferred employee Social Security tax that was not withheld in box 7.
After withholding the deferred taxes in 2021, employers need to fill out Form W-2c, Corrected Wage and Tax Statement, and:
- Enter tax year “2020” in box c,
- Report deferred Social Security tax withheld in 2021 on Form W-2c.
Ensuring Compliance with Form W-2 Reporting
The IRS provides updated tax rates and changes to calculating taxable income each year, but 2020 changes to Form W-2 reporting are more significant due to COVID-19 legislation. Even though this makes managing the payroll tax and reporting even more complicated, it is critical that employers stay up-to-date with the latest information and avoid the frequent penalties in payroll tax reporting.
In their efforts to comply with Form W-2 reporting requirements, employers can consider outsourcing payroll tax management. This process improves accuracy and allows them to avoid common Form W-2 mistakes, prevent severe penalties for noncompliance, and ensure compliance with complex and changing tax regulations.Integrate a payroll management solution to be automatically updated with the latest rules, forms, and standards, stay compliant and avoid hefty penalties.