Comprehensive W-2 Review Presented by: Jacob Franklin, CPA

Comprehensive W-2 Review Presented by: Jacob Franklin, CPA

Presenter Information Jacob Franklin, CPA Senior Tax Manager Grand Forks, ND

Overview 1. Tying Out Year-End Payroll Reports 2. W-2 Example 3. Fringe Benefits 4. Box 11 What is it good for? 5. Correcting a W-2

Tying out Year-End Payroll Reports

Tying out year-end payroll reports The Social Security Administration ties Forms W-3 and W-2 to Form 941 A. Line 2 of the four quarters of Form 941 should tie to box 1 of Form W-3 B. Line 3 of the four quarters of Form 941 should tie to box 2 of Form W-3 C. Line 5a and 5c of the four quarters of Form 941 should tie to box 3 and 5 of Form W-3 D. Form 940 will include exempt wages so it may not tie to the W-3 (cafeteria plan, dependent care, etc.) Additional Medicare Tax 0.9% of wages paid over $200,000 Gets reported in Box 6 of W-3 and line 5d of Form 941

A B C D

Form 941 A B C D

Form 940

Form 8959 Reconciliation on the 1040

W-2 Example

2017 W-2 Example Salary $205,000 Federal Income Tax Withholding - $25,000 Cafeteria Plan Contributions Unreimbursed Medical (FSA) - $750 Child Care - $2,100 403(b) Deferral - $6,064.50 Employer Provided Auto FMV = $19,000; annual lease value = $5,350 Business miles = 12,000; Personal miles = 5,000 Employer provides fuel

W-2 Example Continued Group Term Life Ins 150,000 Group Term Life Employee is 55 years old Employee paid premiums of $180 ($15/month) Cost of Employee s Health Insurance = $5,000 100% paid by employer Employer has 250 employees

Tables from IRS Publication 15-B Table 2-2. Cost Per $1,000 of Protection For 1 Month Age Cost Under 25... $.05 25 through 29....06 30 through 34....08 35 through 39....09 40 through 44....10 45 through 49....15 50 through 54....23 55 through 59....43 60 through 64....66 65 through 69... 1.27 70 and older... 2.06

Auto Benefit Calculation Percent personal use Personal Miles/Total Miles - 5,000/17,000 = 29.41% Annual Lease Value = $5,350 Found in Publication 15-B Use this lease value for 4 full calendar years Calculation of taxable benefit $5,350 * 29.41% = $1,573.44 5,000 Miles *.055/mile = $275 $1,848.44 = (1,573.44 + 275)

Group Term Life Insurance Value of Group Term Life Amount per month from table = $0.43 Number of Months Covered = 12 Total cost per $1,000 of coverage = $5.16 Total coverage (in excess of $50,000) = $100,000-150,000 50,000 = 100,000 Taxable value of protection (100 X $5.16) = $516 Less amount employee paid = ($180) Taxable value of protection = $336

Grossing Up Wages If Social Security and Medicare are not withheld from employee, the amounts paid on the employee s behalf by the employer are taxable. To determine the amount taxable first determine the appropriate gross-up rate.9235 (1 -.062 -.0145) If the employee is below to FICA max.9855 (1 -.0145) for an employee over the FICA max Take the taxable amount where no withholding was taken and divide that amount by the appropriate gross-up rate

Gross Up Wages in Example Auto Lease Inclusion $1,848.44 /.9855 = $ 1,875.64 Group Term Life Insurance $336 /.9855 = $ 340.94

W-2 Example Box 1 Calculation

W-2 Example Box 3 & 5 Calculation

W-2 Example Box 6 Calculation

Make sure you have the codes right Example Roth 401(k) elective deferral portion is a code AA Uncollected Social Security Tax is a code A Even if the coding is correct in the software sometimes the double codes can be cut off

Common Fringe Benefits

Fringe Benefits Common Fringe Benefits Accident and Health Insurance De Minimis Fringe Dependent Care Group Term Life Insurance Working Condition Fringe Benefits

De Minimis Fringe Benefits Excluded from Employee Income under 132(a)(4) Defined by 132(e)(1) The term de minimis fringe means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer s employees) so small as to make accounting for it unreasonable or administratively impracticable Coffee and doughnuts furnished in the breakroom

Working Condition Fringe Excluded from Employee Income under 132(a)(3) Defined as any property or services provided to an employee that if the employee had paid for would have been allowable as a deduction Examples: Cell Phone Laptop Professional Memberships, Dues and Publications Continuing Education!!

Box 11 What is it good for?

Non-Qualified Deferred Compensation Box 11 of Form W-2 is meant for the SSA to determine if part of the amount reported was earned in a prior year. Non-qualified plans or nongovernmental 457(b) plans are subject to Box 3 & 5 when they are no longer subject to substantial risk of forfeiture Do not include the amount in box 11 if it is included in Box 3 & 5, for current year services When the benefit is paid it is included in Box 1 and Box 11 if it was taxable in a previous period in boxes 3 & 5 457(f) plans These are taxable in Box 1, 3, & 5 when they vest regardless of when they are received.

Box 11 - Example Example out of IRS Publication 957 At the end of the risk-of-forfeiture period the Employee s accumulated deferrals (plus interest earned by the plan) are $120,000 $20,000 of deferral for the current year (not included in the 120k) Wages for the year are $80,000 Example Solution Box 1 = 60,000 (80,000 wages 20,000 current def) Box 3 = 127,200 (max for 2017) Box 5 = 200,000 (80,000 wages + 120,000 vested) Box 11 = 120,000 (vested but not from current period)

Additional Examples from IRS Instructions

Horror Story Employee and board of directors negotiated a non-qualified deferred compensation arrangement When the employee met certain metrics the deferred compensation vested Due to the board and employee s wishes the accounting department was not made aware of the arrangement for privacy reasons The metrics were met by the employee and portions of the deferred compensation were vested making them taxable for payroll taxes. No FICA taxes were withheld at the time of vesting making all of the payments subject to FICA withholding at the time of payment. (Special Timing Rule 3121(v)(2)) In Davidson v. Henkel, Employer was held liable for employee s share of FICA taxes

Correcting a W-2

Correcting a W-2 Business Services Online (SSA.GOV) Fast, free, and secure online W-2c filing No separate W-3c is required Employers can create, save, print and submit up to 50 Forms at a time (more can be accomplished by creating multiple sessions) Form 941 & Form 940 will need to be amended as well if wages or withholding change Because the SSA and IRS will tie the W-3 to the 4 quarters of Forms 941 and Form 940, if the wages and withholding change, the payroll forms will need to be amended as well. Only the fields that are modified are reported on a W-2c

Tax Law Changes

Tax Law Change Highlights Tax Cuts and Jobs Act of 2017 made major changes to 119 Meals for the convenience of the employer This is still considered a de minimis fringe benefit to the employee. Even though there is a change to the tax deduction, it is still not includible in the W-2 if it is for the convenience of the employer. 199A - QBI W-2 s that are not timely filed will not be allowed for the 199A deduction wage limitation Unreimbursed Employee Business Expenses If you have previously had a non-accountable plan, the employees will no longer be receiving a tax benefit for the deduction of the expenses on their Form 1040.

Reminders

New Filing Deadline Filing Deadline is still 01/31/2019 30 Day NON- Automatic Extension is available Form 8809 Only 1 extension allowed Section of Form 8809 where the reason for extension is selected

Deposit Requirements Social Security/Medicare/Fed Withholding (Form 941) Pay with return if the total tax is less than $2,500 for either the current quarter or the preceding quarter Monthly Depositor - Total taxes during the lookback period were $50,000 or less - Deposit is due by the 15 th day of the following month Semiweekly - Total taxes during the lookback period were more than $50,000 - Wed/Thurs/Fri payroll deposit is due the following Wednesday - Sat/Sun/Mon/Tues payrolls are due on Friday A liability of $100,000 or more, the deposit is due the next day Lookback Period for 2018 is July 1, 2016 June 30, 2017

Deposit Requirements Federal Unemployment Tax (Form 940) Tax of $500 or less pay with return Deposit requirement: - If the FUTA is $500 or less in a quarter, no deposit is required. The liability is carried over to the next quarter. - Once the $500 limited is reached, a deposit is due by the last day of the month following the quarter (Form 941 due date)

Penalties Failure to Deposit Penalties 1-5 days late = 2% 6-15 days late = 5% More than 15 days late = 10% Amounts not deposited through EFTPS are automatically 10% Failure to Deposit Penalties are eligible for the First-Time Abate under IRM 20.1.1.3.6.1 FTD, FTP, FTF are all eligible interest can not be abated

Penalties W-2 (information return) late filing penalty Large Business (Gross receipts more than $5 million) - Not more than 30 days late = $50 per W-2 ($536,000 max) - 31 days late but before 08/01 = $100 per W-2 ($1,609,000) - After August 1 = $260 per return ($3,218,500 max) - Intentional Disregard = $530 each (no limit) Small Business (Gross receipts $5 million or less) per return amount is the same as the large business, but the maximums are lower - <30 days = $187,500-31 Aug 1 = $536,000 - After Aug 1 = $1,072,500 - Intentional Disregard = no limit

Questions?