Payroll Tax Compliance – 1-4-16

Payroll Tax Compliance

Payroll tax compliance mandates specific year-end filings within the first month preceding the end of the year. W-2’s, 1099’s, and federal unemployment tax annual reports for 2015 must be sent to employees, recipients and the federal government, respectively, by January 31st. Fourth-quarter filings for the previous year (Form 941, including employment taxes, withholdings, deposit amounts and liabilities to the IRS) are also due by January 31st of the following year

W-2’s and 1099’s

W-2 forms are required by federal government to be sent to employees for assistance in the preparation of tax returns, and dictate the employees’ respective wage and salary information from the prior year. A business must include their business name, address and federal employer ID number in each form; employee earnings and withholdings, including Social Security and Medicare; state and/or local taxes withheld, if any; and participation in a retirement plan as well as other employee information. W-2 form Copies B and C are sent to employees after completion, while Copy A is sent to the Social Security Administration (due February 28th, along with form W-3), and Copies 1 and 2 are filed for the cities, states or local governments affected.

1099’s are similar to W-2’s in that they furnish information for the assistance in the preparation of tax returns; however, instead of employees, Form 1099’s are sent to independent contract workers. Though determined in a case by case basis by the IRS, independent contract workers are generally those who define themselves as self-employed, or “…has the right to control or direct only the result of the work and not what will be done and how it will be done” (IRS.gov). Similar information, with a few slight differences, must be populated by the recipient of an independent contractor’s work (the employer, in the case of W-2 preparation): federal employer ID number, business name and address; payment amounts; federal withholdings; non-qualified deferred compensation plans; and state and local withholdings. Copies B and 2 are then sent to the independent contractor, while Copy A is sent to the Internal Revenue Service, Copy 1 to the state tax departments, and Copy C kept by the payee. Just as a W-3 is sent to the SSA on February 28th, Form 1096 is due to the IRS for the summation of all 1099 forms.

Form 940: Federal Unemployment Tax Annual Report

Form 940, typically referred to as the FUTA report, calculates any underpaid federal unemployment tax for the prior year. Preparation of this form requires the summation of all payments to employees; subtraction of exemptions from FUTA, including dependent care benefits, group life insurance and retirement payments; and subtraction of any payments in excess of limitation ($7,000).

Fourth-Quarter Filings: Form 941

Fourth-quarter filings for the previous year (Form 941, including employment taxes, withholdings, deposit amounts and liabilities to the IRS) are also due by January 31st of the following year, and should not be missed in the chaos of other year-end filings in lieu of penalty payments.