Mindy: Hi. Thanks, John. This is Mindy Mayo. I am a managing director in our Employment Tax practice, and I’m on the west coast, specializing in everything that belongs on a W-2 and this fun topic that we’re dealing with today.
John: Thank you, Mindy. Now that we’ve finished the W-2 filing season, many times there’s a need to file amended W-2s, 941s as well as state and local payroll tax returns for a variety of reasons. W-2 amendments also require additional amended payroll filings to ensure there’s a reconciliation between wages reported to Social Security Administration and the amounts that are reported to the Internal Revenue Service. Within the payroll filings there are also specific intricacies to consider when you’re filing amended returns for prior years. I’m going to turn it over to Mindy to discuss some of these points.
Mindy: This is W-2c season, as we know, and there are typical W-2cs that we encounter every year and questions that we get from our employees. So, already we’re seeing a lot of requests for adjustments made due to repayments made in the year after receipt. These always cause issues with companies and how to actually handle these. So, definitely always remember in the year after receipt, if your employees are doing a repayment, that you are only going to be adjusting Social Security and Medicare in the year that they actually received the bonus or relocation or whatever it is that they’re repaying back to you.
So the employees are basically going to repay back gross minus the Social Security and Medicare taxes. They cannot receive a credit back for the federal and state income tax withholding. So you really have to keep this in mind and make sure you don’t refund that money back. A lot of times I’ve seen HR, Legal departments, other groups actually refunding this to the employees and tell them to repay their net amount. This will cause you to have to do some recalculations as to how you’re actually going to reflect this for Social Security and Medicare purposes. So, definitely keep that in mind if you have any of these repayments.
Another issue we’re seeing is deceased employee wages. This past year I’ve hit a lot of companies with a lot of confusion around how to handle reporting for those, what goes on the W-2 versus what goes on the 1099. So you definitely want to be aware of the fact that if it’s in the year after death, that you’re actually making a payout that truly is between you and the beneficiary in it’s 1099 issue. The only time you have a W-2 issue is if you actually have compensation that was due to the employee in the year of death. That would be reported for Social Security and Medicare purposes as well. So you may want to take a look. See how any of those were handled during the year and capture all those items and see if W-2cs are needed for those as well.
The big one that we’re going to have this year as well as last year are the state-to-state changes. These are a tough area because you have to take a company stance on how you’re going to deal with these, and we’re seeing a lot of issues across the board from remote workers. I think that the big issue that we’re seeing more than anything are the employees that are fessing up after the fact that they in 2021 lived somewhere other than where you were aware of, and it’s amazing to me that an employee will have withholding throughout the year and not even recognize or understand what’s going on until they go in to file their taxes, and they realize they have withholding in a state that they weren’t even in. So they’re going to request a W-2c.
I’ve seen some companies be very accommodating with this and allow the employee to do the state-to-state change. Other companies are taking the hard or fast approach that you didn’t tell me. Therefore, you’re not getting it, and so that’s one approach as well, if you were unaware of the move, whether you’re actually going to make that change or not.
John: Mindy, I think one of the points here is that ultimately it’ll be based on what the company’s policies are around the need for the employee to submit that information to them on where they were physically performing services, but ultimately as an employer there’s an obligation to properly report wages based on where an employee was physically performing services unless the employee’s primary office state has telecommuting regulations.
Mindy: No, I agree, and this is the issue that all the companies are going to be facing this year with the employees that are requesting these W-2cs, making the change. The first issue you have with that, and both the IRS has cracked down on this as well as the states, would be the adjusting of the W-2 after the fact and removing any federal or state income tax withholding from a jurisdiction.
So, for example, if you’ve been withholding in California, and the employee says they weren’t in California for the entire year, will California actually give you that state income tax withholding back? Their general rule of thumb for most states is that the employee has to true it up when they file their personal return, and so if they’re actually over withheld in one jurisdiction, then they get the money back in that fashion versus the company going and filing an amended return for that.
John: I think this is a great point, because we get this question so much about companies that want to alter the federal and state income tax that was withheld after the calendar year closes versus the Social Security and Medicare tax portions. The IRS has very clear guidance on this that it needs to be due to an administrative error rather than an incorrect amount that was withheld, and I believe most states also follow that regulation.
Mindy: Yes, they’re definitely cracking down on this. So it creates a problem because if you do adjust an employee out, and you leave the withholding in there, your W-2 is going to start or your W-2c is going to look a little wonky at this point. You’re going to have zero wages, assuming they completely remove zero wages, withholding in that jurisdiction and then wages placed in another state. So it definitely creates an issue, but technically that’s what the states are going to expect at this point.
John: Yes. So it’s certainly a lot of intricacies within the filing methodology whenever we’re looking at W-2cs for prior years. Mindy, do you just want to walk through maybe the actual filing process and things that companies should be thinking about?
Mindy: Before we do that, the one last item that I think we want to address are any fringe benefits as well. So then we’ll talk a little bit about the filing and the ways you're going to get through the lovely filing process, but fringe benefits are always another one that we get the W-2cs on, whether somebody has mismarked and didn’t check one of the correct boxes on the W-2c, whether something didn’t get reported in box 12 or box 14, and just the group term life, for example, third-party sick pay, all of those items that go through as fringe benefits. Hopefully you have something built into your yearend processing that you actually are able to check and make sure that you have recorded all your fringe benefits, but that’s also another one.
As for the filing themselves, this is where companies take different perspectives on this, on how quickly you actually file your W-2cs and your 941-Xs, and a lot of it depends on your third-party provider as well. How quickly can they get to these? Employees want their W-2cs immediately. So do you do those outside of your payroll system and then add them in later? Then how quickly do you follow up with the 941-Xs? Some companies wait the entire three years. You have a three-year statutory period. They wait until six months before the statute is going to expire and then file the 941-Xs at that point. That can be problematic if you have W-2cs out there, and now your W-2cs are not matching up to your 941s and your 941-Xs. An out-of-balance condition can potentially happen.
Some other companies file them immediately. You get a handful of W-2cs, and you want to file your amendments. When you do that, I guarantee you will have a 941-X on top of a 941-X on top of a 941-X for a particular quarter. So there has to be a sweet spot in there as to when it makes sense to file them. Gather them up for a year or whatever. A lot of that is a company-by-company determination just on how many adjustments you actually do have. Then again, working with your third-party administrator if you have a third party doing your payroll, just what makes sense for them as well.
A lot of companies want to rush their administrator to getting a 941-X out, and they’re just not doing it after the beginning of the year. So you definitely are going to be waiting until May or June before you start seeing any corrections being issued for last year at all. So a lot of companies will gather them up, issue the W-2cs to the employees for their personal tax filing and then just wait to do the corresponding 941-X adjustments. So John, I don't know if you’ve seen anything different from that. I think it truly varies by company as to what they can handle internally and with their provider.
John: Yes. I definitely think the crux of this will be the timeframes and abilities of third-party providers to file these and when that will occur. I also think for employers to keep in mind that, as has been seen in the news, the IRS and state taxing authorities are severely behind on processing amended filings and even paper returns that are filed. So I would expect that the processing of this and any questions a taxing authority may have probably is going to take longer than it normally would. So you’ll need to just keep on top of that but also to manage expectations on when you’ll see the adjustments processed.
Mindy: Yes, I agree, and by way of finalizing the discussion on the W-2cs, I think the thing that I’m a big fan of is, as companies receive requests from employees on the W-2c, is to create a W-2c log so that you’re putting down what your changes are. But the big portion of that that’s important is the narrative that goes in there as to why the W-2c is occurring to begin with. If you do this on a regular basis, you’ll start to see patterns of what’s being missed every year or where your problem areas are.
So this is a good audit tool to take a look at. You have your log, and you see that you issued 50 W-2cs last year. What were most of them due to when you look through? Is it mostly due to fringe benefits? Then you know you're going to want to hone in on that for this coming year. Or was it all state-to-state moves? Maybe you need to communicate a little bit better to your employees so that they understand. You can avoid a W-2c by a little bit of communication.
John: Great. Thanks, Mindy. I think the lesson here is there’s always a filing season in Payroll. Thank you to everyone who’s been listening today. In future episodes, we’ll continue to address the top-of-mind issues of interest to our listeners. In the meantime, we’d love to hear from you. If you have thoughts on today’s episode or ideas for future episodes, please send us an e-mail at US-TaxWatch@KPMG.com.