A W-2 Form, also known as a Wage and Tax Statement, is a form that an employer completes and provides to the employee to complete their tax return. Form W-2 must contain certain information, including wages earned and state, federal, and other taxes withheld from an employee's earnings. The Form W-2 must be provided to employees before January 31. Employers must also file a copy with the Social Security Administration to keep them aware of an employee's earnings. The SSA must receive it by the end of February.
If you need to complete it, make sure you include all the required information. You will also need the employee's personal information, such as their full legal name, address, social security number, and employee ID. Check for accuracy. Using the wrong information could cause problems for both the employer and the employee when they file their income tax return.
Please note: this form is only used for employees and not self-employed independent contractors or freelancers.
As far as tax documents go, the W-2 is simple. However, it does ask for a lot of information, most of which can be pulled from your payroll information and other personnel records. You need:
Information about the Employer:
Full legal business name
Full address, including zip code, of the business
Employer Identification Number (EIN)
State ID number
Control number; this is the number your payroll processing software assigns the W-2 for record-keeping purposes
Box 1 - Total taxable wages: This includes wages or salary, bonuses, reported tips, and other miscellaneous compensation.
Box 2 - Federal income tax withheld: This Box records the federal tax amount that the employer kept and paid on behalf of the employee.
Box 3 - Social security wages: This is the amount of money subject to social security withholding. For most people, it is the same amount as Box 1.
Box 4 - Social security tax withheld: This is the amount of money that the employer paid to SSA on behalf of the employee.
Box 5 - Medicare wages and tips: This is sometimes a bigger number than what's listed in Box 1. It includes an employee's total taxable compensation and fringe benefits, such as 401K contributions while they are nontaxable, that aren't subject to regular income tax.
Box 6 - Medicare tax withheld: This box documents the amount of Medicare tax the employer paid in on behalf of the employee.
Box 7 - Social security tips: This Box lists the total tips reported by your employee throughout the tax year.
Box 8 - Allocated tips: This only applies if you run a restaurant or other "tip-centric" establishment. It's customary to set aside a percentage of gross sales (usually 8%) to be paid out as tips. This acted as insurance for waitstaff on slow days and included in tax preparation. To calculate allocated tips, subtract the number of tips the employee reported for that year from the set percentage. Fill in the Box only if the difference is a positive number. This will ensure that the employee pays at least the established percentage.
Box 9 - Verification code: This Box is only completed if you're participating in a test program to verify the W-2. Most employers will not use this Box.
Box 10 - Dependent care benefits: Record the total amount of dependent care benefits paid (if applicable) for a qualified dependent care assistance program. This money could be paid directly to the assistance program or the employee. It should reflect the fair market value of the care according to the instructions given by the IRS.
Box 11 - Non-qualified plans: This Box helps the SSA decide if any of the money reported in Boxes 1, 3, or 5 was earned the previous year. The SSA uses this information to ensure that it properly applied social security earnings.
Box 12: Box 12 has four individual spaces labeled 12a, 12b, 12c, and 12d. There is no official title. According to the instructions, these fields are for different codes. An employer may need to use more than one of the boxes. 12a reflects uncollected social security or RRTA tax on tops. 12b reflects uncollected tax for Medicare on tips. 12c reflects the taxable cost of group-term life insurance over $50,000. 12d reflects elective deferrals and designated Roth contributions made to H, S, Y, AA, BB, and EE plans. You can learn about the codes and when to use them, in the General Instructions.
Box 13 - Checkboxes: This Box has three checkboxes: statutory employee, retirement plan, and third-party sick pay. Employers should check all boxes that apply. A statutory employee is an employee whose earnings are subject to social security and Medicare taxes, but they aren't subject to withholding at the federal level. This is not the same as a common-law employee. To learn more, please consult the General Instructions through the link above. If the employee is an active participant in a retirement plan, check this Box. The third-party sick pay box should be checked if you are a third-party sick payer filing a W-2 for an insured's employee or employer reporting sick pay payments made by a third party.
Box 14 - Other: If you include 100% of the amount of a vehicle's annual lease in the employee's income, it is reported in this Box.
Boxes 15 through 20 are used to record state information. You'll notice that there are two lines under each Box. This is for employees who work in two separate states for the business issuing the W-2. If the employee only works in one country, the employer would only fill out the top line for each Box. Box 15 includes the state abbreviation and the employer's state ID number. Box 16 records state wages and tips. It usually matches Box 1. Box 17 documents the amount of state tax withheld by the employer. Plates 18 and 19 generally match Boxes 16 and 17. Box 20 isn't explicitly mentioned in the General Instructions.
Information about Taxes Withheld
Instructions for calculating the following are included with the W-2. Your bookkeeping software should automatically calculate this based on information about your company, its location, and the withholding allowance selected by your employee. Also, remember that tax laws can change every year.
Your bookkeeping software may or may not automatically update to reflect the newest information. It's vital that you stay on top of the yearly changes and, if necessary, consult a tax expert on behalf of your business.
Federal income tax: Use Publication 15 as your guide when calculating this.
State income tax: Total state taxes withheld from an employee's wages throughout the year; more information can be found on your state website.
Local income tax: Total local taxes withheld from an employee's wages throughout the year.
Locality name: A short description of the state or local tax being paid.
Social security tax: Usually a 12.4% deduction, with 6.2% coming out of the employee's wages and 6.2% coming out of your own. There is a maximum amount that can be taxed, but it changes by year. Up to date, information on these tax rates can be found here.
Medicare tax: Typically, a 2.9% tax in total, with 1.45% coming from the employee and 1.45% coming from you.
A Few Things to Remember
Double-check your work; this means double-checking the math if you're calculating taxes by hand, spelling all the names and street addresses, and ID codes such as the SSN. Meet your deadlines. There are specific deadlines that you must meet as an employer when it comes to providing tax forms to your employees and to the tax agencies that need the information. Periods can vary by year or circumstance. Check this section of the IRS website for details.
There are six copies in total. Distribute them as follows:
Copy A goes to the SSA.
Text 1 goes to your state, city, or local tax department (you can learn more about your area's requirements on its official website).
Copies B, C, and the W-2 go to the employee.
You should retain copy D for four years.
The W-2 is probably one of the most common tax forms used by people. The myriad of boxes and blanks can seem frustrating at first glance, but now that you understand them from reading about them earlier in this guide, filling out the form should be easy for you if you must do it by hand.
However, check your bookkeeping and payroll software to determine if the way can be automatically generated for each employee by the end of January.
In Box A, list the employee's SSN. If it is not on the form, or incorrect, it could prevent the employee from filing their taxes on time.
In Box B, you'll list the EIN for the business.
In Box C, you'll add the employer's name, address, and zip code.
In Box D, enter the control number assigned by the company's payroll processing system.
Next, use Box E to list the full name of the employee. The first Box is for the employee's first name and middle initial. The second Box is for the last name. The small Box is to list a suffix.
Record the employee's address (including city, state, and zip code) in Box F.
Next, address the boxes with numbers. Start with Box 1. List the wages, tips, and other compensation paid to the employee. This number should include hourly wages or salary, tips, and bonuses.
In Box 2, list the amount of money withheld for federal income taxes.
Box 3 lists the individual's social security wages.
Box 4 documents how much Social Security tax was withheld on behalf of the employee.
In Box 5, you'll list the amount of income eligible for the Medicare tax.
In Box 6, you'll document: the amount of the Medicare tax withheld.
Use Box 7 to record tip income that was reported by the employee to the employer.
Use Box 8 for any tip income that was assigned to the employee by the employer.
Use Box 9 if you're still involved in a verification code program. On most W-2s, this Box is blank.
Use Box 10 to list any amount of money for dependent care reimbursed through a flex spending account, paid directly to a provider by the employer, or paid to the employee to reimburse dependent care expenses.
Most businesses don't use Box 11. However, if necessary, you'd use it to report money paid to an employee as part of an on-qualified compensation plan or non-government pension plan.
In Box 12, you'll list deferred compensation. This usually involves savings or retirement plans.
You'll check the appropriate boxes in Box 13.
In Box 14, you'll list any additional information that must be reported.
Box 15 marks the beginning of state information. The employer's state employer tax identification number will be listed here. There's room for you to record data for two states for one employee.
Box 16 lists the total number of taxable wages earned in the state.
In Box 17, you'll list the amount of state income tax withheld.
Use Box 18 to record the number of an employee's wages that are subject to local, city, or other taxes.
In Box 19, you'll list the amount of local income tax withheld.
Box 20 lists the locality or city being paid locally.
Common errors on the W-2 Form when completing it by hand include making entries using ink that is too light or making entries that are too small or too large. Make sure to use black ink and clear writing if you complete it by hand. If generated by a computer, use a clear font, such as Courier, that is easy to read. Also, make sure not to add dollar signs to the boxes that list dollar amounts. Do not omit decimal points and cents from entries.
Most importantly, do not incorrectly format the employee's name in Box E. There are stringent penalties for employers who fail to complete the W-2 Form by the end of January.
Starting your own business is an exciting endeavor and a dream come true for many people. You get to be your own boss and earn a living while pursuing your very own vision. Yet, it does come with a lot of responsibility and, most of the time, at least some financial stress.
Fortunately, the Internal Revenue Service helps small business owners by providing a bit of a tax break. This is very helpful because it takes some of the financial strain off of your business. In the first months and years, startups need to focus on minimizing costs as much as possible. That's why knowing the ins and outs of tax filing for startups is crucial. It can mean the difference between sinking and swimming in the first years of your business.
Read this guide on how to navigate startup taxes so you can stay on top of your finances and your filings when tax time rolls around.
Filing taxes as a startup can be a lengthy process. Don't leave it until the last minute. Ideally, you should start your paperwork as early as possible, but make sure to begin at least a month before the April 15th deadline. There are always expenses and payment receipts that must be chased down. Especially in the early years of your business, you probably won't have a smooth process in place to ensure everything gets wrapped up quickly and easily.
Hire an Accountant
If you can afford to do so, hiring an accountant will make your taxes much easier. Try to find an accountant who is skilled in working with startups. Such a person will be able to provide much better advice about credits and deductions than a more traditional firm that is generally works with large businesses and salaried employees. You don't technically need an accountant, but chances are, in the early years, you are going to be too busy running your business to worry about all the paperwork yourself.
Accountants can also offer critical advice and help you make wise business decisions as your company grows. The American Institute of Certified Public Accountants (AICPA) is a recognized and reliable source for finding an accountant. It has a directory of CPAs, accounting companies and local accounting societies. You can also ask other small business owners for recommendations.
Pay Quarterly Taxes
Startups, like all businesses, are required to pay taxes on a quarterly basis, except for the first year. You can wait until April 15 and pay in bulk after your inaugural year. Waiting doesn’t really do you any favors. It's good to get into the practice of paying taxes every three months. Go ahead and establish a habit of setting aside a percentage of each payment you receive and then reviewing your profit and loss statement every quarter to determine how much you owe. An accountant can help you estimate these payments and set up a dedicated account to contribute money toward these payments.
Prices for an accountant will vary depending on where you are located and whether he is certified or not, but according to Entrepreneur, you can expect to pay fees of between $100 and $275 per hour.
Determine Your Entity
The type of business entity you choose determines how you will report your taxes and what your tax rates will be. You can choose a sole proprietorship, partnership, LLC, or other form of corporation. There is no tried-and-true way to determine which business formation will work best for you. It’s best to speak with a lawyer or CPA to find out which model will provide you with the best benefits. The right choice will help make more capital available for running your business.
Track Your Expenses
Now that you're running a business, one of the best ways you can save money is by keeping track of every single business expense down to the last penny. If you have to commute to meet partners or investors, you can deduct miles driven and gas expenses. Office supplies, rent on office space, food and beverages for employees, hotel stays while you're drumming up new clients, or attending conferences -- don't let these slip through the cracks.
Don't Forget about 1099s
If you use a freelancer or contractor during the year and pay them more than $600, you must issue 1099-MISC Forms to both the employee and the IRS. If you don't, you could face a costly penalty.
Connect With Other Small Businesses
The Small Business Administration is a great resource for helping you find others in the startup community who can provide valuable advice. The SBA provides business counseling and training across the country and can connect you with specific assistance depending on your needs, such as Women's Business Ownership Representatives and the Minority Enterprise Development Program.
Taxes don't have to be a daunting task! If you keep clear records, stay on top of your paperwork throughout the year, and work with a reputable software or accountant, you can help your startup save money and increase your chances of success.
Startup Tax Deductions
Startup costs are a little different than regular business deductions because they must be incurred during the planning and development stage of your business. They are literally the costs that are helping you start the business. Many startup owners fail to recognize that these costs include everything you're doing to build and promote your business, including market research, location scouting for your office, staff training, legal fees, communications, etc. Advertising your company or opening is also a legitimate startup expense. Programs such as TurboTax will walk you through all these expenses, as can an accountant if you hire one.
Many startup expenses, such as organizational costs, can either be amortized or deducted in full the first year. If you choose to amortize, make sure the costs are incurred before your business opens. Amortization is a good option if you don't expect to bring in a ton of cash your first year. It lets you stretch out the deduction over future tax years when a tax break would be more beneficial.
R&D Tax Credit
If you are a startup company with annual gross receipts less than $5 million, you can apply up to $250,000 of your R&D credit against your payroll tax liability. This is a recent change that was made to help new small businesses receive credit for R&D.
Work Opportunity Tax Credit
The work opportunity tax credit (WOTC) gives a federal tax credit to employers who hire from certain groups, including food stamp recipients, veterans and other designated community residents. For most of these groups, the credit is up to $2,400 per qualified employee in their first year of employment. The veterans program offers employers a tax credit of up to $9,600 in the first year. Taking advantage of this credit can help reduce your overall tax burden.