Form W-2 filing penalties on the rise

Over the past couple of filing seasons, employers have seen sharp increases in the penalties for failure to properly file information returns and provide payee statements-including those all-important Forms W-2, Wage and Tax Statements, for employees [I.R.C. §6721 and §6722, as amended by the Trade Preference Extension Act of 2015, Pub. Law No. 114-27 (6/29/2015)]. And now, those penalties are going up once again.

Background

Under a change in the law for returns and statements required to be filed after December 31, 2015, the basic penalty for failure to file Form W-2 on time or failure to provide all the required and correct information more than doubled from $100 per W-2 form to $250 per form. The separate penalty for failure to furnish correct payee statements increased accordingly. Moreover, the maximum penalty climbed from $1.5 million for a calendar year to $3 million for the year.
Reduced maximum penalties apply to smaller employers with average gross receipts of $5 million or less for the three most recent taxable years. However, even for those employers, the maximum penalty increased from $500,000 to $1 million. In addition, the reduced penalties that apply to failures that are corrected promptly increased significantly. For failures corrected within 30 days, the basic penalty increased from $30 to $50 per return, with the annual penalty cap increasing from $250,000 to $500,000 (from $75,000 to $175,000 for smaller employers). The penalty for failures corrected by August 1 also climbed from $60 to $100 per return, and the maximum penalty increased from $500,000 to $1.5 million (from $200,000 to $500,000 for smaller employers). Those penalty increases were not a one-shot deal. The law also called for inflation adjustments to the penalty amounts. Thus, the penalties for upcoming 2017 W-2 filings will be even higher [Rev. Proc. 2016-55, 2016-45 I.R.B. 707]. What’s more, the IRS has just announced the adjusted penalty amounts that will apply for 2018 W-2s, which will be filed in 2019 [Rev. Proc. 2017-58, 2017-45 I.R.B., 10/19/2017].
The following charts show the penalty amounts that will apply for W-2 forms required to be filed in 2018 and 2019:

Penalties for 2017 Forms W-2 Filed in 2018:

Basic penalty — $260 per return
Basic penalty-annual maximum — $3,218,500
Basic penalty-small business maximum — $1,072,500
Correction within 30 days — $50 per return
Correction within 30 days-annual maximum — $536,000
Correction within 30 days-small business maximum — $187,500
Correction by August 1 — $100 per return
Correction by August 1-annual maximum — $1,609,000
Correction by August 1-small business maximum — $536,000

Penalties for 2018 Forms W-2 Filed in 2019:

Basic penalty — $270 per return
Basic penalty-annual maximum — $3,282,500
Basic penalty-small business maximum — $1,094,000
Correction within 30 days — $50 per return
Correction within 30 days-annual maximum — $547,000
Correction within 30 days-small business maximum — $191,000
Correction by August 1 — $100 per return
Correction by August 1-annual maximum — $1,641,000
Correction by August 1-small business maximum — $547,000

IMPORTANT REMINDER. Employers should bear in mind that W-2 forms are now due to the Social Security Administration by January 31 following the close of the tax year-the same date that copies of Form W-2 are due to employees. In addition, extensions for filing Form W-2 are no longer automatic. Only one non-automatic 30-day extension may be applied for by filing Form 8809, Application for Extension of Time to File Information Returns, before the January 31 deadline. Moreover, extensions will be granted only in limited circumstances.
The January 31 deadline means that employers have only a short period of time following the close of the tax year to complete and file accurate Forms W-2. Moreover, the 30-day window for making corrections will run from the January 31 due date, making it imperative that employers promptly spot and correct any filing mistakes.

Accuracy matters

Getting it right the first time around can pay off in the form of penalty relief. The IRS will not penalize employers for “inconsequential” errors and omissions in filing Form W-2s. An inconsequential error is one that does not prevent the IRS from processing the form, correlating the information, or using the form for its intended purpose.

Payroll tax return penalties

Employers should be aware that the potential penalties for payroll tax return filing errors are also increasing.
Under I.R.C. §6651, a penalty is imposed for failure to file a required return on or before the filing due date or for failure to pay the amount shown as tax on a return. This penalty applies to the Form 941 quarterly employment tax returns and the annual Form 940 unemployment tax return that you must file each year.
As a general rule, the penalty is 5%of the net amount of tax due for each month that the return is not filed up to a maximum of 25%. However, if a return is not filed within 60 days of the due date (including extensions), the I.R.C. provides for a minimum penalty equal to the lesser of $135 or 100% of the tax due. In the case of returns required to be filed after December 31, 2014, the minimum penalty is indexed for inflation. The minimum penalty increased to $210 for returns required to be filed in 2017 and will increase again to $215 for 2018.

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