WHAT IS FORM W-2 (The Wage and Tax Statement)?

Employees have to file Form-1040 that has a complete summary of their income. In addition to Form 1040, Form W-2 is also submitted by the employee. Form W-2  is a form that is provided by your employer and contains complete details of your wages and taxes withheld by your employer. The taxes withheld by the employer are the taxes that have already been paid in advance to the IRS on your behalf by the employer. 

The amount to be deducted is calculated on the basis of Form W-4, which is to be filled by an employee at the time of joining. Here are some other details:

  • Employers are legally bound to provide FORM W-2 to each and every one of its employees by 31st January of the next year to the financial year.  
  • Form W-2 is filed both by employers as well as employees to the IRS.
  • It keeps track of the employee’s income and also determines the authenticity of the taxes filed.
  • It works as a check system for employers too since it cross-checks 

 whether the employer has deducted a legitimate portion of the salary and also whether the employer has filed all the deducted portions appropriately to the respective departments.

  • Employers also have to file quarterly reports of the taxes withheld to the IRS.
  • FORM-W2 is also a contribution to an employee’s retirement plan.

WHY ARE TAXES DEDUCTED BY THE EMPLOYER?

The IRS  issues guidelines to the employers to hold a percentage of the total income tax, due to an employee. This process ensures timely filing of the returns and also ensures that the employees are not burdened by the income tax amount by the end of the year. For this reason, an estimate of your total income tax is withheld in small parts per month by your employer. 

WHAT ALL TAXES ARE DEDUCTED IN THE SALARY?

The FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) of the U.S. mandates the deduction of taxes from salary. The actual percentage of taxes deducted vary from state to state, as the policies of states are subjective. The taxes are concerned not to a single department but to various departments. It includes taxes at federal, state and local levels. The distribution of taxes are as follows:


A) AT FEDERAL LEVEL

  • FEDERAL INCOME TAX (DEPENDS UPON THE TAX BRACKET) 
  • SOCIAL SECURITY TAX @ 6.2%(only the first $132,900 of earnings in 2019)
  • MEDICARE TAX @ 1.45% , NO MAXIMUM CONTRIBUTION. IF THE ANNUAL INCOME EXCEEDS $200,000/- FOR INDIVIDUALS THEN ADDITIONAL 0.9% IS LEVIED I.E. 1.45%+0.9%=2.35%. THERE IS NO WAGE CAP ON MEDICARE.

B) STATE INCOME TAX-LEVIED BY STATE. THE STATE MAY ALSO APPLY ADDITIONAL TAXES. THESE TAXES VARIES FROM STATE TO STATE.

C) LOCAL INCOME TAX– LEVIED BY LOCAL GOVERNMENTS. MOSTLY INCLUDES TAX ON PROPERTY.

D) SPECIAL-PURPOSE GOVERNMENTAL JURISDICTIONS- THESE TAXES ARE LEVIED BY COUNTIES OR MUNICIPAL CORPORATIONS. 

*NOTE-  Not all states levy taxes and the percent of the state income tax is subjective to respective states. 

DOES EMPLOYERS ALSO SHARE BURDEN OF PAYROLL TAXES?
Yes, the employer also pays an equivalent amount from the employee’s withholding. The employer pays 6.2% on the SOCIAL SECURITY TAX  (only the first $132,900 of earnings in 2019) and 1.45% on the MEDICARE TAXES. An extra 0.9% is paid by the employee on the MEDICARE TAXES if the salary is above $200,000, total medicare taxes being 2.35%.

In addition to the above taxes, the employer also has to pay some other taxes.


A) FEDERAL UNEMPLOYMENT TAX ACT (FUTA)– It is a federal law under which it is mandatory for an employer to pay this tax. This tax is to fund unemployment compensation for employees who lose their jobs. The FUTA rate stands for 6% of the first $7000 of wages.

B) STATE UNEMPLOYMENT TAX ACT (SUTA)– It is the same tax as FUTA but applicable at the state level and varies from state to state.

WHERE TO GET FORM W-2 IF YOU SWITCHED MULTIPLE  JOBS IN A YEAR?

The IRS makes it compulsory for the employers to file FORM W-2. For each and every employer you have worked for in a year is liable to provide you with the Form W-2 for that particular duration. On the other hand, the employer has the responsibility to submit Form W-2 to the IRS as well.


PARTS/COPIES OF FORM W-2 REQUIRED BY THE EMPLOYER


A total of 6 copies of FORM W-2 are required. 

  1. COPY A- For Social Security Administration.
  2. COPY 1- For City, State, or Locality.
  3. COPY B- For filing an employee’s federal tax return.
  4. COPY 4- This is for employee’s records.
  5. COPY 2- It is another copy for City, State, or Locality.
  6. COPY D- For an employer’s record.

PENALTIES TO THE EMPLOYERS FOR NOT FILING FORM W-2 BY JANUARY 31 

It is mandatory for an employer to file W-2 by January 31 of the coming year which means that it should be in the employee’s mailbox on or before January 31.

Failing this, the employer must write a letter to the IRS explaining the reasons for the same. There is no obligation on the IRS to accept the employer’s request as it is at their discretion.

The penalty structure is as follows:

  • $50 per W-2 Form within 30 days from January 31.
  • $1000 per form if not filed between periods exceeding 30 days and 1st of August. The maximum fine can range between $1,609,000 and $5,360,000 depending upon the company.
  • The IRS also penalizes incorrect forms filled by an employer.

IF THE EMPLOYER SHUTDOWN HIS BUSINESS.

Form W-2 is universally applicable to every employer. In case a company shuts down, it is still under the legislature and has the obligation to submit Form W-2 to the IRS and its employees. 

INSTRUCTIONS/HOW TO FILL FORM W-2?

Box 1 — Here the cumulative income of an employee is reported for a complete year irrespective of the source of remittance.

Box 2 — It shows the total tax withheld by the employer 

Box 3 — Is for wages subjected to Social security tax. 

Box 4 — the amount of Social Security tax withheld by the employer.

Box 5 — is for your wages subject to Medicare tax. This amount may vary to the amount reported in Box 1.

Box 6 — depicts the total of Medicare tax withheld by the employer. It includes:

  • 1.45% Medicare tax that is withheld by the employer and 0.9% Additional Medicare tax for income exceeding $200,000.

Box 7 — any tip income reported to your employer.

Box 8 — It shows tip income given to you by your employer. This amount is not to be included in boxes of 1, 3, 5 or 7.

For any unreported tip, income refers to details on Form 4137.

Box 10 — This shows  dependent care benefits under the dependent care assistance program. Amount exceeding $5,000 is also included in Box 1. Refer Form 2441, to compute any taxable and nontaxable amounts.

Box 11 — shows the total amount distributed to you from your employer’s non-qualified (taxable) deferred compensation plan.

Box 12 — There are different FORM W-2 codes that represent different types of benefits or compensation.  This box should be filled referring to the suitable codes provided in the form of single or double letters. 

Box 13 — This box has 3 boxes of 

  1. STATUTORY EMPLOYEE: is for an individual contractor who is to be considered as an employee. 
  2. RETIREMENT PLAN: it is the duty of the employer to check whether the employee was a participant in a qualifying retirement plan.  
  3. THIRD-PARTY SICK PAY: It is checked generally when the payments are made by any third party for sickness, disability etc. The third party is the payment made by your insurance. 

Box 14 — This box can be used by an employer to report any other tax information that is not included in the above box. The information may be

  • State disability insurance taxes withheld
  • Union dues
  • Uniform payments
  • Health insurance premiums deducted
  • Nontaxable income
  • Educational assistance payments
  • A member of the clergy’s parsonage allowance and utilities
  • Charitable contributions made through payroll deduction

Railroad employers use this W-2 box to report:

  • RRTA compensation
  • Tier I tax
  • Tier II tax
  • Medicare tax
  • Additional Medicare tax

INFORMATION FOR BOXES 15 TO 20

Box 15 to 20 are related to states and local taxes that are applicable. It can be filled referring to the state and local tax structure of your area. It includes the total amount of state and local taxes and what amount was withheld by the employer.