W-2 questions

Q1. If I was paid a cash bonus in 2010 and 2011, can my employer report both years of bonus on my 2011 w-2?

A. The answer to your question is really quite simple.  When did you receive the money?  Payroll taxes are calculated like cash accounting.  When funds are “constructively received,” they become taxable.  If your employer gave you a check in 2011 and you didn’t deposit it until 2012, those funds are still taxable in 2011.  If your employer pays you a bonus in 2010, it is to be reported and taxed in 2010.  The only way a 2010 bonus could be added into a 2011 W-2 would be if the bonus was announced, but not actually paid until the following year.

Q2. What if I never get my W-2 from my employer for last year’s work?

A2. You need a W-2 to get your tax return right.  No tax preparer should be trying to make a return based on a pay stub.  The IRS has issued Tax Tip 2012-20 to address this issue.

1. Contact your employer to see if the W-2 was even mailed yet.  Employers are required to have these in the mail before February 1st.  Perhaps they have an old address for you?  Once you contact the employer, give them some time to get the W-2 into the mail system.
2. Contact the IRS.  If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you will be asked for your name, address, Social Security number, phone number.  You will be verbally creating a new W-2.  The IRS will ask for the employer’s name, address and phone number, dates of employment and an estimate of wages and withholding.  You may be required to get this from your final pay stub if you still have it.  This will probably initiate some inquiries from the IRS to your employer as to the reason they are ignoring their requirements.
3. File your return using Form 4852, which is the substitute W-2.  This may delay any refunds you are entitled to because of the verification process.
4. If your W-2 unexpectedly shows up after filing your return, examine it to see if it matches the substitute values you reported.  If they are different, you will need to file an amended tax return.

W-2s are a serious business with the IRS, make sure, as an employer, you take care to get them right.  Employees count on them to process a correct tax return and determine their actual legal tax liability.

Oh where, oh where did my W-2 go?

Q.  I received a letter from the IRS this morning saying that I never filed my 2006 or 2007 tax returns.  I know I did not file with IRS or my state.  What do I do?  My employer never sent me a W-2 to file with.

A. You have two very serious problems here.  You need to get to a CPA or other tax preparer as quickly as possible to take care of them.  First, your employer(s) of record for the previous year is/are required t0 Read more »

Mortgage and Income Documentation

Q. I am currently applying for a loan and need copies of my paystubs.  Where can I get those?  I checked online but can’t find them.

A.  When I did support for PaycheckCity.com, I can’t tell you how many times I was asked that question.  Everything from:

• How do I get my paystubs to
• What does my W-4 say to
• I lost my W-2.  Can you get me a new copy?

was asked to the Read more »

Employee or Independent contractor

Q. I am a painter and my boss says I am an independent contractor. He says I have to pay all my own taxes and my paycheck will be my total wages instead of minus taxes. Is that correct?

A. Unfortunately, I can’t make the distinction of whether or not you are actually an employee. I can tell you that in my experience many workers in the service industry like painters, plumbers and other laborers are incorrectly classified. The issue is the level of control exerted over your work. For a definitive answer, you can complete form SS-8 and send it to the IRS for review. I wrote an article about this topic that you can read here. For purposes of this blog, I will describe the effect of both scenarios from a tax perspective.

If you are truly an employee, then the employer matches what you contribute to Social Security and Medicare. Depending on your state, you could be eligible for health benefits. Your employer will also pay FUTA and SUTA (state and federal unemployment). Your state also requires that enmployers maintain some sort of workers compensation coverage in case you are injured on the job. As an employee, you get a certain level of protection again lay offs and on-the-job injury that the employer must pay for. You can see why certain companies try to skirt these requirements. They are expensive.

As an independent contractor, you are liable for self-employment taxes and have no work comp or unemployment insurance coverage in most cases. This means, the “employer” saves a ton of money. He also moves the risk off his own business and sticks it to the contractor. This also means that you the contractor must file quarterly estimated tax payments with the IRS or risk large penalty and interest payments. You are liable for all taxes.

In a mis-classified situation where you are actually an employee but considered a contractor by your “employer”, it is very likely that the “employer” is not paying tax on his/her income either. The IRS has identified this as a significant source of the so-called “tax gap” and is looking closely at ways to find and audit organizations in these industries.

Good luck on your quest. Ignorance is often the cause of misclassification. However, more often than not, it is an outright attempt to hide from the government in my opinion.

W-2 and W-4

Q. What’s the difference between a W-2 and a W-4?

A. Through my tenure on the IRS IRPAC advisory group, I have learned one great rule, there are thousands of abbreviations and acronyms thrown around the government. Just in payroll there are so many of them that is hard for someone who works in that field to keep them straight, let alone those who are regular employees. You have the W-2, the W-4, the 1099, the I-9, 941, 940, 94X, 2678 and the list goes on. As time goes on, I hope to decode what some of these forms are used for in the payroll world. This is the first issue in that (probably very long-running) series.

Employers use the W-2 to report annual wages paid to their employees. If you have more than one job, you will receive one W-2 per employer. The numbers in those boxes are used by your tax preparer to determine your tax liability. If you are in the company 401(k) or pre-tax medical plan, the gross wage boxes will likely be different. This is ok.

Employees use the Form W-4 to report allowances and filing status to their employer. The numbers you submit will be used by your employer to determine your withholding amounts for Federal income tax only. Social Security and Medicare are calculated as flat percentages and are not affected by your filing status. The Form W-4 is your best tax planning tool. If you work with your CPA or tax adviser on completing this form correctly, you can minimize extra tax due and minimize the refund you receive at the end of the year. Whenever a major life change occurs, make sure you adjust your W-4 values accordingly as quickly as possible.

While they both start with W’s, they have distinctly different uses. Using the correct terminology will make your communication with the payroll department much more efficient and less confusing.