The Trade Preferences Extension Act of 2015 doubled the amounts of penalties for businesses that mishandle filing of W2 forms for employees and 1099 forms for contractors and customers. W2 is the primary tool for tracking wages and benefits. Form 1099 is one of the IRS’s main weapons in fighting under-reporting by self-employed taxpayers.
The recently increased penalties are listed as ‘offset provisions’ to raise additional new tax revenue to pay for other costs of the new law. The new penalties apply after Dec. 31, 2015. These penalties are assessed under Internal Revenue Code sections 6721 and 6722. Code section 6721 applies to the returns required to be filed with the IRS. Code section 6722 applies to the returns required to be provided to employees or other recipients of taxable compensation.
Failure to file
The penalty for a single unintentional failure to file a W2 or 1099 is raised to $500 ($250 for failure to file with the IRS and $250 for failure to provide a filing to the other party). The penalty for intentionally failing to file a W2 or 1099 is increased to $1,000 (again $500 for failure to file with IRS and $500 for failure to provide the filing to the other party). This penalty is assessed for each violation up to a maximum penalty in the millions.
If the IRS determines that the amount reported on the Forms W-2 and Forms 1099 are incorrect, the employer could incur $1,000 in additional penalties.
State tax implications
If a W2 or 1099 is corrected through this penalty assessment process the employer will likely owe additional taxes and penalties to the state.
When to file
For most employers W2s must be filed by the end of January. The deadline for filing most 1099s is the end of February.
Minimum amounts reportable
W2s must be filed for all employees regardless of the amounts. Even if you hired a person for one day and did not even call them an “employee”, the tax law says that a W2 must be filed. A 1099 must be filed for a contractor if the amount paid was more than $600.
Larger payments to contractors
Keep in mind that IRS has a vigorous enforcement effort underway to reclassify some payments for services made to contractors as wages to employees.
Who is responsible
The employer is responsible for the filing. Do not presume that W2 filing and 1099 filing is already included in your service contract with a payroll service provider, your bookkeeper or your tax preparer. Make sure this service is specifically listed in your service agreement. In most cases the employer cannot pass of the liability for penalties to a service provider but there may be some limited relief from penalties for a first time offense under these circumstances.
In many cases the easiest way to deal with the requirement is to tap into existing technology that is already used by the business. An accountant can often integrate a W2 or 1099 service onto the existing computerized accounting system like QuickBooks, Xero or Gusto or through an “add on” or “plug in” to another service. For those businesses still doing accounting manually or through some other method the challenge can be more significant. In every case, it would be smart for every business to consider this issue and have a conversation with their accountant about reviewing their reporting requirement mechanisms before year end 2015.
In many cases, a separate accounting procedure meant to review the books for potential issues could be conducted in January. This procedure would likely utilize a checklist of often overlooked issues related to the filing requirements. It makes sense to review the total amounts reported on each W2 and 1099 and reconcile this with the employer’s summary expense report for the year. In order to be effective, this procedure must be completed in advance of the filing deadline and allow enough time to make necessary corrections.
See IRS publications and the instructions for Forms W2 and 1099 for details, special circumstances and exceptions to the reporting laws that cannot be covered in this article.
In many cases I can provide online accounting assistance to resolve the wage tax reporting problems for less than the cost of a single IRS penalty. See this blog post for more information about the 2015 deadline.