Law changes over the past few years have significantly upped the ante for employers when it comes to preparing Form W-2 wage and tax statements accurately and on time.
In the past, W-2 forms were due to employees by Jan. 31 following the close of the tax year, while the forms were not required to be filed with the Social Security Administration (SSA) until the last day of February for paper filings or March 31 for electronic filings. Under current rules, W-2s are now due to the SSA by Jan. 31—the same day they are due to employees— thus eliminating any “window of correction” for spotting and fixing errors before officially filing the forms. What’s more, another law change has significantly increased the W-2 filing penalties by providing for annual inflation adjustments. For example, by 2017, the basic penalty for failure to file Form W-2 on time, or failure to provide all the required and correct information, had jumped to $260 per return.
The first step in making a W-2 correction is to determine whether the error must or can be corrected.
Social Security and Medicare Taxes
As a general rule, an employer must correct any overwithholding of Social Security or Medicare taxes and refund the overage to the employee. In the case of underpayment, an employer must report and pay the correct amount, including employee and employer shares. However, the employer can recoup underwithholding from future payments to the employee. Overwithholding or underwitholding of the additional Medicare tax should not be corrected.
An employer cannot correct income tax withholding errors once the taxes have been deposited. The employee must make up any shortfall or obtain a refund by filing a tax return.
If an employee was underpaid or overpaid, repayment or back pay to correct the mistake is reflected on the W-2 for the year of the correction. However, if an employee repays excess wages for the prior year, the employer must correct the amount of Social Security and Medicare wages and tax shown on the W-2 for the prior year.
An employer must correct the error if the employee’s name or Social Security number was incorrectly reported on Form W-2. On the other hand, if the only error on an employee’s Form W-2 is an incorrect address, no correction is required to be sent to the SSA.
Finally, the general rule is that a correction is required when an amount shown on Form W-2 is incorrect. For example, although federal income tax withholding errors cannot be corrected, a correction must be made if the amount of withholding shown on the W-2 does not match the actual amount withheld.
De Minimis Safe Harbor
Despite the basic rules, a de minimis safe harbor provides that an error is not required to be corrected and no penalty will be imposed if the error involves an incorrect dollar amount that’s off by no more than $100. The de minimis threshold is $25 for errors in the amount of tax withheld [IRC §§6721(c)(3), 6722(c)(3)].
The de minimis error safe harbor applies only to inadvertent errors; an employer that intentionally misreports a dollar amount will be penalized even if the amount otherwise qualifies as de minimis. In addition, the safe harbor does not apply to a failure to furnish Form W-2 to the employee, even if the form involves de minimis dollar amounts.
An employee who receives an incorrect form may elect not to have the safe harbor apply. If an employee makes an election, the employer may be subject to penalties even if the incorrect amount is a de minimis error. However, an error will be treated as due to reasonable cause and not willful neglect and no penalties will apply if the employer furnishes a corrected form to the employee or payee and files a corrected form within 30 days.
KEY POINT: An employer is not prohibited from filing a corrected form for a de minimis error, even if an employee or payee does not make an election out of the safe harbor. The IRS encourages employers to correct errors on Form W-2 even if they are de minimis. This will prevent mismatches between the employer’s employment tax returns and the amounts reported to SSA, and will ensure that employees receive proper Social Security credit for their earnings.