Year-End Planning: Prepare Forms W-2

As we near the end of 2020, it is time for employers to begin preparing Forms W-2 to send in January.

All forms W-2, and W-3 for the 2020 tax year must be filed by January 31, 2021.

Consequently, now is the time to begin gathering necessary information for W-2 reporting for various items such as retirement plan contributions, insurance, personal use of company vehicles, and employee fringe benefits. This information should to be provided to your payroll service no later than the last 2020 payroll run for timely preparation of W-2s.

Below is an overview of some of the common items that should be reported on W-2s.  If you need our assistance, we will be happy to help.

Families First Coronavirus Response Act (FFCRA)
Employers must report the amount of qualified sick leave wages and qualified family leave wages paid to employees under the FFCRA, P.L. 115-127, on either 2020 Forms W-2, Box 14, or on a separate statement. This provides employees who are also self-employed with amounts they may need to figure their qualified sick leave equivalent or qualified family leave equivalent. See Notice 2020-54 for more information on how to report these amounts.

Social Security Tax Deferral
When reporting any deferred Social Security taxes this year, Forms W-2 should only reflect the amount of Social Security tax actually withheld from an employee’s 2020 wages. Employers will need to file, and issue to the employee, a Form W-2c, Corrected Wages and Tax Statement, when the employee’s deferred 2020 Social Security tax is withheld from the employee’s pay in 2021.

For employers:

  • Employers should report the total Social Security wages paid to the employee (including any wages for which Social Security tax was deferred) on Form W-2 in Box 3 and/or Box 7.
  • Employers should not include in Box 4 any Social Security tax that was not withheld.
  • Employers should enter tax year 2020 in Box C of Form W-2c and adjust the amount previously reported on Box 4 of Form W-2 to include the 2020 deferred Social Security tax that was withheld from the employee’s wages in 2021.

Paper Forms W-2c should be filed with the Social Security Administration, along with Form W-3c, as soon as possible after the employer has finished withholding the employee’s deferred Social Security taxes. Copies of Forms W-2c should also be provided to employees.

For employees:

  • Employees who had two or more employers in 2020 will need to determine whether they paid excess Social Security tax in 2020. If so, they will need to file a Form 1040-X, Amended U.S. Individual Income Tax Return.
  • If an employee only had one employer during 2020 and their 2020 Form W-2c only shows a correction to Box 4 to account for their employer’s 2021 withholding of deferred 2020 Social Security tax, the employee does not need to do anything.

Retirement Plan Contributions
You should provide your payroll service with the necessary information to correctly report retirement plan contributions on the W-2s for you and your employees. The payroll service needs to know:

  • The plan type;
  • The terms of the plan; and
  • The amount of deferral for each employee.

Elective deferrals should be reported on W-2 in Box 12 with the appropriate code depending on the plan type.  The Retirement Plan box should be marked in Box 13.

In most cases the amount of the elective deferral should be subtracted from Wages in Box 1, but included in Social Security Wages in Box 3 and Medicare wages in Box 5.  Only if you have a ROTH provision in your plan would you have contributions to the plan included in the amount in Box 1.

Accident and Health Insurance for S-Corporation >2% Shareholders
Health insurance premiums paid by the S-Corporation for a 2 percent or greater shareholder should be added to gross wages.  This amount should be included in Boxes 1, 14, and 16.  In Box 14 describe the amount as “SE Health Ins.”

If Long Term Care Insurance is also paid by the S-Corporation, the premiums should also be included in wages along with the health insurance premiums.  In Box 14 describe this amount as “LT Care Ins.”

Group Term Life Insurance
Group term life insurance up to $50,000 is not taxable for employees.  However for 2 percent and greater S-Corporation shareholders the premiums on group term life insurance coverage up to $50,000 should be included in wages on the W-2 and subject to employment taxes.  This is included on the W-2 in Boxes 1, 3, and 5.  It is identified in Box 14 as “Group Life Ins.”

You must include in any employee’s wages, including 2 percent or greater S-Corporation shareholder, the cost of group term life insurance beyond $50,000 of coverage, reduced by the amount the employee paid toward the coverage.  The amount to include on the W-2 is computed based on the “Uniform Premium Cost Table.”  This is based on a factor depending upon the insured’s age.  The calculated amount, reduced by the amount the employee paid for the coverage, should then be included on the W-2 in Boxes 1, 3, and 5.  It is identified in Box 12 with Code C.  The instructions for calculation can be found on the IRS website in Publication 15b Employer’s Tax Guide to Fringe Benefits (Employer’s Tax Guide to Fringe Benefits).  You can also contact our office for assistance.

Personal Use of Auto
The amount for personal use of auto should be documented, calculated, and included on the W-2 for both owners and employees who have access to business owned and leased vehicles.  This amount is included in Boxes 1, 3, 5, 14, and 16.  In Box 14 describe the amount as “Pers. Use Corp. Auto.”  Personal use includes commuting (driving from home to work) miles.

RECORD KEEPING
Employees and owners will need to keep “adequate” records substantiating their business use of the company vehicles.  “Adequate” includes the time, date and the business purpose of each use.  The IRS previously allowed an employee to pick a sample period of time and apply the resulting business percentage to the entire year in lieu of daily record keeping.  However, the IRS is now requiring a current daily mileage log that is not reconstructed at a later date or created from a sample of usual miles driven.

LEASED VEHICLES
If company vehicles are leased, the same method as described above is used for the personal use amount to include on the appropriate W-2s.

This calculation can be confusing so please do not wait until the end of December to do this calculation.  If you would like our assistance with these calculations, send us the following information at least two weeks prior to turning your final payroll in to the payroll company.

DESCRIPTION OF VEHICLE
Please note if electric/hybrid or truck/van
Driver of vehicle-name/position
Total Business miles driven during the year (1)
Total commuting (home to work and back) miles driven during the year (2)
Total other personal (non-commuting) miles (3)
Total miles driven during the year (1+2+3)
Was the vehicle available for personal use during off-duty hours?
Is another vehicle available for personal use?
Monthly lease payment & payee (include copy of lease agreement if not already provided)
Is the gross vehicle weight over 6,000 pounds?

Other Fringe Benefits
Any fringe benefit you provide is taxable and must be included in the recipient’s pay unless the law specifically excludes it.  Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how small, are never excludable, except for occasional meal or transportation fare.  This type of fringe benefit is typically given as holiday gifts or during the year as performance incentives.  Please see Publication 15b Employer’s Tax Guide to Fringe Benefits for more detailed information (Employer’s Tax Guide to Fringe Benefits). This publication also provides a list of items that are specifically excludable.

Affordable Care Act
The Affordable Care Act requires employers to report the total value of certain employer-sponsored health benefits on employees’ Form W-2.  It is intended to help employees better understand the benefit they receive through their employers, and at the same time gain awareness of the true cost to obtain health coverage.

Businesses filing 250 or more Forms W-2 for the preceding calendar year are required to comply with this provision.  The health care amounts reported on the W-2 are strictly informational and not taxable to the employee.  The aggregate cost (both employer-paid and employee-paid portions) of health insurance coverage is reported in box 12 of Form W-2 using code DD.

Per the chart on the IRS website, the following coverage types should be reported:

  • Major medical
    • Do not report separate dental or vision plans.
    • This does not include payment/reimbursement of health insurance premiums for 2 percent or greater shareholder-employee that was included in gross income;
  • Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefits;
  • Hospital indemnity or specified illness (insured or self-funded), paid through salary reduction (pre-tax) or by employer;
  • Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverage. This is required if employer charges a COBRA premium;
  • On-site medical clinics providing applicable employer-sponsored healthcare coverage. This is required if employer charges a COBRA premium;
  • Wellness programs providing applicable employer-sponsored healthcare coverage. This is required if employer charges a COBRA premium; and
  • Domestic partner coverage included in gross income.

The chart includes other items that you do not report or that reporting is optional.

Again, should you have any questions or need assistance with any of the above items, please contact our office.

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