How to Handle W-2 and 1099-Misc Forms

It is that time of the year when minds drift toward taxes. If you are an employer or have contract help working for you, W-2 and 1099-Misc. forms must be issued soon. Actually, they have to be in the hands of the employee by the end of January to comply with the law. The government’s copy can come a couple of weeks later.

Taxable wages have to be reported to the federal government when anyone makes more than $600 in a calendar year or taxes have been withheld. This is true for federal, state, and local income taxes and Social Security/Medicare taxes. Any taxes withheld have to be recorded and sent to the Internal Revenue Service of the correct governmental division.

The forms themselves can be obtained for free in small quantities for small businesses. To produce large numbers of forms automatically, the forms must be purchased as continuous form documents for tractor-feed printers or created by computer program as they are produced. The type of form needed depends on your method of producing them. If you are going to produce your own forms from blank paper, the right type of stock with perforations needs to be secured.

You will need certain information available before beginning to prepare the actual forms. The form requires you to have the employee’s name, address, and social security number regardless of whether it is a 1099-misc. or a W-2. You will also need the business name, address, and federal and state identification numbers.

Once you have the identifying information, for W-2 forms, you need to know the amount of taxable wages for all governmental levels affected. You will need to make sure that any non-taxable items are withheld from the appropriate boxes. For example, if you have 401k deductions or deductions for a similar type of retirement account, these wages are not taxable and should be excluded from the taxable wages boxes. The same is true for approved health care type deductions.

The gross wages should be included in the proper box for reference purposes. These wages will only be listed once. The taxable wages must be repeated for federal, state, and local wages in the correct box in that area of the form. The taxes should be listed in the box next to the taxable wages for federal, Social Security/Medicare, state, and local taxes. Once these numbers are in place, the W-2 form is normally complete. If other special cases have been used for your system of payroll, consult with the instructions or an accountant for proper usage. There are too many variable to cover all of them here.

When completing the 1099-misc., the only real information needed after the employee and company data is the taxable wages. Since contract employees have no taxes withheld, there are none to report. The government considers these people to be self-employed.

Some classes of employees are considered self-employed, but should receive a W-2 form and not a 1099-misc. The primary example of this would ministers who receive a salary from a church body. For these employees, the W-2 is filled out with just the taxable wages because no taxes are withheld.

The reason for this oddity is that churches are not taxed. This means they are not liable for the 7.65% of wages that employers remit for Social Security/Medicare taxes. The minister who still participates in the Social Security program is required to pay the entire 15.3% of the tax just as self-employed people do.

A copy of all W-2 and 1099-misc. forms are kept by the employer and a copy sent to the government. Enough copies of the forms are given to the employees so that a form is available to them for each type of taxes withheld. If the employee worked in multiple states, a separate copy must be given for each state.

The wages and taxes from the forms must be totaled and recorded on a cover sheet. For form W-2, this is a W-3 statement. Only one W-3 is filed regardless of the number of W-2’s attached. W-2 forms are to be left as near to continuous-form as possible. Under a separate cover, the employer remits taxes on form 941 to the federal government at the same time.