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CPP Review Course. Section 8 Depositing and Reporting Withheld Taxes Part 2. 8.7 Penalties for Late Reporting and Paying Tax. Late filing of employment tax returns results in an “addition to tax”

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cpp review course

CPP Review Course

Section 8

Depositing and Reporting Withheld Taxes

Part 2

8 7 penalties for late reporting and paying tax
8.7 Penalties for Late Reporting and Paying Tax
  • Late filing of employment tax returns results in an “addition to tax”
    • 5% of the tax shown on the return for each month the return is late up to the maximum of 25% (higher % if fraudulent)
  • Failure to pay employment taxes results in an “addition to tax”
  • Additions to tax, civil penalties & interest are not the only penalties employers face
    • Criminal fines & imprisonment can also be enforced
8 7 penalties for late reporting and paying tax1
8.7 Penalties for Late Reporting and Paying Tax
  • 1998 – IRS Restructuring and Reform Act, IRS penalty & interest notices have to include details as to how they were determined & also including:
    • Name of the penalty
    • IRC section under which it is imposed
    • Computation of the penalty
8 8 information reporting for employees
8.8 Information Reporting for Employees

Six-part form sent to the employee, the SSA, state, local taxing agencies & employer copy

Employee copy must be made available to the employee by January 31st of the year following the reporting year.

8 8 information reporting for employees1
8.8 Information Reporting for Employees
  • Should a Form W-2 be provided?
    • IRC requires a Form W-2 to be provided by any employer engaged in a trade or business that pays compensation to an employee for work performed, even if the employee is not paid in cash
    • IRC requires Form W-2 if the employer withheld federal income tax from the employee or would have done so if the employee had claimed no more than one withholding allowance
    • IRC requires Form W-2 reporting for all wages, as defined for federal income tax withholding purposes and for all noncash compensation provided to an employee that is not subject to withholding, if the total of the wages and the noncash compensation is at least $600 in a calendar year
8 8 information reporting for employees2
8.8 Information Reporting for Employees
  • Surviving corporation after a merger or consolidation issues W-2’s for all employees during the year
  • Successorship options:
    • Standard: Predecessor makes final payment of wages & reports the wages on Form W-2; successor reports only the wages it pays
    • Alternate: Successor provides Forms W-2 for all wages & taxes from both parties; predecessor only issues Forms W-2 for employees who did not work for the successor after the acquisition – Requires each company to file Schedule D to explain discrepancies between their Forms 941 and W-2
8 8 information reporting for employees3
8.8 Information Reporting for Employees
  • Special problems in providing Forms W-2
    • Undeliverable Forms W-2: The employer has been unable, after reasonable effort, to deliver the employee’s copies; it must keep those copies for 4 years
    • Reissued Forms W-2: If an employee loses a Form W-2, the employer can issue a new copy to the employee and should write “Reissued Statement” on it unless the form is provided to the employee electronically
    • Corrected Forms W-2: If Copy A has not been sent to the SSA, the employer provides the employee with corrected copies of the Form W-2 with “CORRECTED” written on them
8 8 information reporting for employees4
8.8 Information Reporting for Employees
  • When & where to furnish Form W-2
    • Copy A, Form W-2 is an information return & must be sent to the SSA
      • Paper copy due by February 28
      • Electronically due by March 31 (this was extended by the IRS Restructuring and Reform Act of 1998)
    • Copies B, C & 2, Form W-2 are the employee’s copies; these information statements must be sent to the employee by January 31 of the following year
      • Copy B – Employee Federal copy
      • Copy C – Employee’s Records
      • Copy 2 – Employee State or Local copy
8 8 information reporting for employees5
8.8 Information Reporting for Employees
  • Employer can provide copies electronically with the employee’s consent
    • Employer must provide the employee with a clear statement containing the required disclosures
    • Electronic copy must contain all the required information as a substitute statement
    • Must be accessible by January 31
    • Employee must be notified by January 31 the electronic copy is available
    • Employer must maintain access to the electronic copy through October 15 of the following year
8 8 information reporting for employees6
8.8 Information Reporting for Employees
  • Substitute Forms W-2 are acceptable as long as they meet IRS requirements & maintain the core information
  • Miscellaneous Form W-2 Issues
    • Hyphenation – Employer EIN & Employee SSN must contain hyphens
    • Dollar amounts – Entered without commas or dollar signs, but with decimal points & cents portion shown
    • Electronic reporting – Employers filing 250 or more Forms W-2 for a calendar year are required to file them electronically
8 9 information reporting for employers to ssa
8.9 Information Reporting for Employers to SSA
  • Providing Wage & Tax Info to the SSA – Form W-3
    • If filing paper W-2 (Copy A) with the SSA, Form W-3, Transmittal of Wage and Tax Statements
    • Form W-3 contains totals of the amounts reported on the employer’s W-2 forms, acting as a “reconciliation” of those forms
    • Form W-3 not for electronic filers; employers that file electronically do not file a transmittal document
8 9 information reporting for employers to ssa1
8.9 Information Reporting for Employers to SSA
  • When and where to file Form W-3?
    • Due date for filing is the same as Copy A of Form W-2 with SSA – last day of February
    • Mailed with all Copy A Forms W-2
8 10 correcting information statements forms w 2c w 3c
8.10 Correcting Information StatementsForms W-2c & W-3c
  • W-2c consists of six parts, same as the W-2
  • Copy A of Form W-2c must be sent to the SSA along with Form W-3c which totals the information from all the W-2c forms being submitted
  • Electronic filing requirement applies only for the immediate prior year
8 11 the reconciliation process for employers
8.11 The Reconciliation Process for Employers
  • With the differing aspects to the tax collection, payment & reporting process – it is imperative that employers keep track of each step and its relationship to the others
  • To help prevent “out-of-balance” conditions and reduce their confrontations with federal and state tax agencies, employers must periodically “reconcile” their wage and tax information
8 11 the reconciliation process for employers3
8.11 The Reconciliation Process for Employers
  • If an employer’s totals from its four quarterly Forms 941 do not agree with the totals from its Forms W-2 the IRS or SSA will inquire as to why & expect corrections to be made
  • These amounts include:
    • Social security wages
    • Social security tips
    • Medicare wages and tips
    • Advanced EIC payments
8 12 information returns for 1099 seri es
8.12 Information Returns for 1099 Series

Annual statement sent to a nonemployee payee & a copy is sent to the IRS (not SSA) along with a transmittal Form 1096. Helps the IRS determine whether individuals are reporting all their taxable nonwage income on their personal return.

8 12 information returns for 1099 seri es1
8.12 Information Returns for 1099 Series
  • Pension and Retirement Plan Distributions – Form 1099-R
    • Payers who make distributions of retirement income must report those payments and any amount withheld for federal income tax on From 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance contracts, etc
    • Distributions from all types of retirement plans must be reported on Form 1099-R
    • Must report taxable and nontaxable amounts distributed; gross distribution is entered in Box 1, taxable amount in Box 2a, & the nontaxable amount in Box 5
8 12 information returns for 1099 seri es2
8.12 Information Returns for 1099 Series
  • Pension and Retirement Plan Distributions – Form 1099-R
    • Determining Taxable & Nontaxable amounts:
      • All employee contributions to a qualified retirement plan, as well as employee pre-tax contributions plus the earnings on all plan contributions are included in the taxable amount of a distribution
      • The nontaxable amount is the portion of the distribution attributable to employee after-tax contributions, which were already taxed as wages before the contribution was made
8 12 information returns for 1099 seri es3
8.12 Information Returns for 1099 Series
  • Designated Roth contributions
    • Effective in reporting year 2006, trustees must report the year when the employee began making designated Roth contributions from a 401(k) or 403(b) plan in the box, “1st year of design. Roth contrib.”
    • Designated Roth account distributions that are not qualified distributions must be reported on form 1099-R, with distribution code B in Box 7. Use code Q for qualified distributions from a Roth IRA. The employee’s basis in the distributions is reported in Box 5.
8 12 information returns for 1099 seri es4
8.12 Information Returns for 1099 Series
  • Direct rollovers:
    • Payers making a direct rollover of a plan distribution must report the amount distributed on Form 1099-R as it would any other distribution
    • The payer must also add a distribution code in Box 7 identifying the distribution as a direct rollover
  • Filing form 1099-R
    • Copies B, C and 2 of Form 1099-R must be sent to the payee by January 31 of the year after the year during which the distributions were made
    • Paper Copy A due by February 28, with transmittal Form 1096
    • Electronic Copy A due by March 31
    • Electronic filing is required if filing 250 or more Forms 1099-R
8 13 penalties for incorrect or late information returns statements
8.13 Penalties for Incorrect or Late Information Returns & Statements
  • Failure to File Information returns
    • Penalties are assessed against employers or payers that file information returns with the IRS or SSA:
      • After the due date “Failure to file timely”
      • Incorrect/Incomplete Info “Failure to file correct information”
  • The severity of the penalty generally depends on how late the return is filed or how late the correct or complete info is provided
  • Willful failures bring higher penalties
  • Payers can be sued for filing fraudulent returns
  • Agency allows for a small number of incorrect or incomplete returns corrected at no cost
  • Insignificant errors are not penalized
  • No penalty for errors due to reasonable cause
8 13 failure to provide information statements to employees
8.13 Failure to Provide Information Statements to Employees
  • Employee Statements if not provided to an employee or other payee on time or with correct info, a penalty of $50 per statement may be imposed, up to a maximum of $100,000
  • No lower maximums for small business
  • Willful failures bring higher penalties
  • No “de minimis” exception
  • No penalty for inconsequential errors
  • No penalty for errors due to reasonable cause
  • Fraud brings criminal & civil penalties
8 14 electronic reporting requirements
8.14 Electronic Reporting Requirements
  • Employers that file 250 or more Forms W-2 , Copy A must file them electronically
  • Same applies to 1099 filing
  • 250-threshold applies to each type of form separately, not in total
  • SSA no longer accepts mag media for Form W-2 filing
  • Forms W-2c, effective in 2007, IRS requires file 250 or more during a calendar year to be filed electronically with the SSA, only applies to Forms W-2 corrected for the immediate prior year
8 14 electronic reporting requirements1
8.14 Electronic Reporting Requirements
  • Electronic wage reporting over the Internet
    • Electronic Forms W-2 are filed over the Internet through the SSA’s Business Services Online (BSO)
    • Can be used to file Forms W-2 from the third week of December through the end of the filing season (March 31)
    • Employers can fill in and submit W-2s/W-3s and W-2cs/W-3sc online
      • This encourages small employers to submit online without incurring programming costs
    • Electronic Forms 1099 are filed with the IRS through the Filing Information Returns Electronically (FIRE) system at http://fire.irs.gov
8 14 electronic reporting requirements2
8.14 Electronic Reporting Requirements
  • Employment tax e-file system for Forms 940, 941 & 944
    • Allows electronic return originators (EROs) to offer their clients electronic employment tax filing
      • Features:
      • Filing options, flexible filing, explicit error conditions, instant acknowledgements, integrated payment option, electronic signature process
      • Who can participate?
      • EROs, Reporting agents, third party transmitters, software developers, online filing providers
8 15 reporting special wage payments to the ssa
8.15 Reporting “Special Wage Payments” to the SSA
  • Special Wage Payments refer to payments made by an employer to an employee or a former employee that the employee earned in a prior year
    • These payments significantly impact retired employees unless the SSA is notified about such payments; benefits can be reduced when the annual earnings test is applied
    • However, wages or payments received in one year but earned in a previous year are not counted under the “annual earnings test”
8 15 reporting special wage payments to the ssa1
8.15 Reporting “Special Wage Payments” to the SSA
  • Examples of special wage payments
    • Bonuses
    • Accumulated vacation or sick pay
    • Severance pay
    • Back pay
    • Standby pay
    • Sales commissions
    • Stock options
    • Payments on account of retirement, or deferred compensation reported on a Form W-2 for one year but earned in a prior year
8 15 reporting special wage payments to the ssa2
8.15 Reporting “Special Wage Payments” to the SSA
  • Reporting requirements:
    • Guidance for reporting special wage payments can be found in IRS Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration
    • Can report electronically through SSA’s BSO or via magnetic media