COVID-19 and the CARES Act have caused a wave of change in 2020. In the bookkeeping world, celebrating the end of a year also means ramping up for W-2 and 1099 season. “Happy New Year!”
After third-quarter deadlines are met, work slows down. At ATKG, the CAS Team utilizes this downtime to clean-up vendor, customer, and employee files. We concentrate on missing information such as address changes, missing W-9’s, and change of withholding status (marriage, divorce, children, etc.) for employees.
Form W-2, Copy A is used to report employee wages to the Social Security Administration (SSA). It is filed with Form W-3, which serves as a transmittal summary of the W-2s being submitted. The deadline to submit W-2s and W-3 to the SSA is January 31, 2021. Employees must receive their copy of Form W-2 by January 31, as well.
Form W-2, Copies B, and C provide information to an employee regarding their compensation for the calendar year. It contains amounts for wages, withholding, and elective deferrals. This information is necessary when preparing their personal Form 1040.
Utilizing automated payroll software is beneficial for compiling information regarding employee compensation. However, it is always best practice to double-check all wage, withholding, and elective deferral figures for accuracy.
All boxes on Form W-2 and the information they contain are important. The most used are Boxes 1 – 6. Below is a brief description of the information included in these boxes:
- Box 1: Employee wages subject to Federal withholding. This will include hourly wages, salaries, bonuses, reported tips, and taxable fringe benefits. Pre-tax benefits, such as health insurance premiums, and employee elective deferrals to a retirement plan, are not typically included in Box 1.
- Box 2: Federal tax withheld for the employee.
- Box 3: Employee wages subject to Social Security tax. This amount may differ from Box 1 due to:
- Retirement plan contributions,
- Exclusion of social security tips and/or
- The maximum amount of wages subject to Social Security tax –
- $137,700 for 2020
- Increases to $142,800 in 2021
- Box 4: Amount of Social Security tax withheld for the employee. This amount equals to 6.2% of the amount in Box 3, but no more than $8,537.40 for 2020 ($8,853.60 in 2021).
- Box 5: Employee wages subject to Medicare tax. This amount may differ from Box 1, similar to Social Security wages in Box 3. There is no maximum wage limit subject to Medicare.
- Box 6: Amount of Medicare tax withheld for the employee. This should equal 1.45% of the amount in Box 5. There is no maximum amount.
- If an employee makes over $200,000 (Single/Head of Household), $125,000 (Married filing separately), or $250,000 (Married filing jointly), there is an additional 0.9% Medicare tax that must be withheld and reported on the W-2.
- Boxes 7 – 14 are equally important if they pertain to individual employee compensation. These boxes will not apply to all employees.
For detailed instructions on Form W-2 & Form W-3, see the IRS website: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf.
Form 1099 is provided to vendors and reports payments made by the issuer for services received during the calendar year. This year the IRS has brought back a form from the ’70s called the 1099-NEC (Non-Employee Compensation). This form will be used in place of Box 7 on the 1099-MISC. The deadline to submit 1099-MISC and Form 1096, which serves as the cover sheet of all 1099s submitted to the IRS, is January 31, 2021. When you submit 1099’s, 1096 should accompany each set of forms. Recipients must receive their copy of Form 1099 by January 31, 2021, as well.
Form 1099 contains basic information, such as the issuer’s name, address, and EIN or SSN (if it is an individual), as well as the recipient’s name, address, and EIN/SSN. The best practice for collecting the recipient’s information is to request a Form W-9 before making any payments. This will ensure you have all information necessary to complete an accurate 1099-MISC.
Form 1099-MISC must be completed for each individual or company paid during the calendar year while conducting your trade or business. These amounts include:
- At least $10 in royalties (1099-MISC Box 2), interest (1099-INT), or dividends (1099-DIV)
- At least $600 in:
- Rents – 1099-MISC, Box 1
- Services performed by someone who is not your employee (Contract Worker) – 1099-NEC
- Prizes and awards – 1099-MISC, Box 3
- Medical and health care payments (not to include monthly insurance premiums) – 1099-MISC, Box 6
- Payments to an attorney –
- 1099-NEC (for legal services), or
- 1099-MISC, Box 10 (settlement of lawsuit)
- Back up Withholding –
- 1099-NEC, Box 4, or
- 1099-MISC, Box 4
Generally, payments made to corporations do not have to be reported on Form 1099-MISC. The exceptions to this rule are:
- Medical and health care payments (does not include monthly premiums) reported in Box 6,
- Gross proceeds paid to an attorney (lawsuit settlements), reported in Box 10, and
- Substitute payments in place of dividends or tax-exempt interest reported in Box 8.
For detailed instructions on Form 1099-MISC, see the IRS website: https://www.irs.gov/pub/irs-pdf/i1099msc.pdf.
ATKG Is Here for You
This brief overview is designed to assist you in preparing and managing your 2020 W-2 and 1099 business preparation. For questions unique to your accounting situation, feel free to reach out to a member of ATKG’s Client Accounting Services team.