Among your responsibilities as an employer is ensuring the reporting of employee and independent contractor income information to the Internal Revenue Service (IRS) each year.
In addition to IRS reporting, employers are required to provide employees and independent contractors with a summary of their earned income for the previous year. (They use the supplied information when filing their individual annual tax returns.)
Employee information is reported using IRS Form W-2, while Form 1099-MISC is used to report contract worker income. Although the reporting of contractor earnings is required only for those who earn more than $600 annually, some employers choose to report income for all 1099 employees. Be sure to ask each of your contractors (whether you call them a freelancer, independent contractor, or consultant) to fill out a W-9, Request for Taxpayer Identification Number and Certification , so you have the information needed to complete their 1099-MISC forms.
W-2s for employees’ 2017 income are due to the IRS along with a summary report by January 31, 2018; the same deadline applies for 1099-MISC forms (and Form 1096 , the Annual Summary and Transmittal of Information Returns ).
The January 31, 2018, deadline also applies to providing employees and contractors with income information for 2017.
For verification purposes, employers must file copies with the Social Security Administration (using Form W-3) by the end of January.
If you have more than 250 employee and/or contractor forms to submit, you must submit them electronically.
If you’re using QuickBooks® (or other tax software) for your firm’s book-keeping, you can likely access the required forms online. Otherwise, you can get forms at most office supply stores and online, at the IRS website.
Penalties for Non-Compliance
California employers must provide employees with a federal W-2, Wage and Tax Statement , by January 31, as required under Section 13050 of the California Unemployment Insurance Code (CUIC). Failure to do so (or for furnishing false or fraudulent statements) is subject to a state penalty of $50 for each such failure under Section 13052 of the CUIC.
California State Senate Bill 542 requires businesses and government entities (defined as a “service-recipient”) to report specified information to the Employment Development Department on independent contractors (defined as a “service-provider”).
If you hire an independent contractor and he or she is an individual or sole proprietor earning or entering into a service contract for $600 or more, you are required to report independent contractor information using Form 1099-MISC.
Employers are subject to a penalty of $24 for each failure to report a 1099-MISC worker’s income within the required timeframes, unless the failure is due to good cause. If the failure to report is an intentional agreement between the service-recipient and service-provider to not supply the required information to the state or to supply a false or incomplete report, a penalty of $490 may apply.
Federal penalties start at $50 per return, up to a maximum of $536,000, if forms are not more than 30 days late. The “per return penalty” increases to $100 (and a maximum of $1,609,000) if the form is 31 or more days late but filed by August 1. If the form is filed after August 1 or not at all, the penalty increases to $260 per return (up to a maximum of $3,218,500). Employers who intentionally disregard the filing deadlines are subject to a penalty of $530 for each return (with no maximum limitation).
Small businesses (which are defined as those with gross annual receipts of $5 million or less) are subject to the same per return penalties noted above, although the maximum penalty amounts are different – $187,500 if forms are not more than 30 days late, $536,000 if 31 or more days late (but filed by August 1), and $1,072,500 if not filed by August 1 or not filed at all.
The same penalty structure applies to W-2 and 1099-MISC income reporting and filing.
For additional information on W-2 reporting requirements or instructions, visit the IRS website and refer to the IRS Employer’s Tax Guide (Publication 15, Circular E) and Instructions for Forms W-2 and W-3 , respectively.
For additional guidance on completing state information on Form W-2, refer to the California Employer’s Guide, DE 44. For information on state reporting of independent contractor income, refer to Report of Independent Contractor(s), DE 542. If an employee or contractor performs services in more than one state, contact the other state(s) for guidance.
Employees vs. Contractors
Be sure you pay people based on the work they do and how they are categorized – as an employee or a contractor. Then make sure you file the correct income information (using Form W-2 or 1099-MISC) with federal and state authorities.
Filing is required by law – and your failure to comply could result in substantial penalties for each late return. Don’t risk a fine – at both the state and federal level; comply with the guidelines and make sure you act by the January 31 due date.
For information on the IRS extension of the filing deadline for employers to provide health coverage forms to individuals (using Forms 1095-B and 1095-C), link here. The paper-filer deadline, which was January 31, 2018, has been extended to February 28th, while electronic filers have until April 2, 2018.