Representatives for the Internal Revenue Service and Social Security Administration convened May 17 at the 41st Payroll Congress to answer questions and provide guidance on common wage reporting issues.
Employers must pay close attention when reporting annual wages to ensure consistent information across all submitted reports, said Joseph Guillen, a senior tax analyst for the IRS. “We compare notes [and] want to make sure W-2s match your 941, 943, and 942,” he said, highlighting the agency’s Combined Annual Wage Reporting program, or CAWR.
Combined Annual Wage Reporting
The IRS and SSA jointly administer the CAWR, which compares federal income taxes, Medicare wages, and Social Security wages and tips reported to the IRS against amounts received by the SSA through Forms W-2, Wage and Tax Statement.
In early June, the IRS begins comparing reports received by the agency with Forms W-2, Guillen said. “We want to make sure everything reported to the IRS is reported in the individual’s tax return.”
The IRS sends a notice to employers if a reporting discrepancy is detected. Employers have 30 days to respond to the notice and explain the discrepancy, he said.
If an employer fails to provide the IRS with a timely response, the agency sends a second notice proposing a tax increase. This notice gives employers an additional 45 days to respond but requires a penalty payment if employers fail to provide a timely response.
“If you get a notice from [the IRS], you must act,” Guillen warned.
The SSA is responsible for resolving discrepancies in Social Security and Medicare wage reporting. If a discrepancy is detected, the SSA will reach out to employers with a questionnaire informing them of it. The agency will generally reach out only if the wages reported in the employer’s tax returns are higher than those reported in Form W-2, said Matthew Newton, technical advisor for the SSA.
Unlike the IRS, the SSA does not have the ability to directly assess penalties. “We don’t propose penalties, but you do need to respond to us,” said Newton. However, under the CAWR, the IRS can assess penalties on employers that fail to respond to the SSA’s questionnaire.
Both agencies process employee information before reviewing employer reports, Guillen added. Consequently, employees will generally notify employers ahead of time if discrepancies exist. “You will know you have a [wage reporting] case coming before you get a notice from us” he said. “Pay attention if you have an employee come to you regarding a reporting discrepancy.”
To ensure compliance, it is important for employers, employees, and payroll departments to communicate with one another, said John Myett, chief tax liaison officer for Payroll People Inc.
“A lot of these issues can be resolved quickly or even avoided altogether with really good communication,” Guillen added, highlighting the importance of collaboration in ensuring compliance.
Employers should take preventative measures to avoid discrepancies and remain involved and engaged even if they rely on third-party reporting agencies, he suggested.
“Prevention is key. Review and resolve out of balance conditions and file forms before the compliance cutoff date,” he said. “You want to file as quickly as possible.”
As previously mentioned, employees will generally be the first to receive notice of a discrepancy and will be required to promptly respond.
“Do some research for your employees. While you can’t respond for them, you can give them the necessary information to respond to the IRS,” said Myett, “This type of commitment to employees will keep them happy and working hard for you.”
The SSA recommends employers to electronically file Forms W-2 because many paper versions are not processed until March, two months after the Jan. 31 filing deadline. Newton also suggested employers use the authentication program offered through the SSA’s Business Services Online platform. The update will increase data security but might take awhile for employers first logging in, so employers should log in as soon as possible. “Please don’t wait until January to log in,” he said.
Newton and Guillen both implored employers to immediately contact the SSA or IRS if any reporting issues are detected and quickly file any necessary corrections.
“Give us a call,” said Newton, “our staff wont bite.”
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