What to do if errors on your W-2 or 1099
Since deer season is over, the Lions are mercifully finished for the year, I’m too busy to go ice fishing, NASCAR doesn’t start until Daytona next month, and why watch golf without Tiger, I will get my cup of Herman’s Boy Pantlind Blend coffee and write an article for this week’s Squire.
A few weeks ago, I wrote about not receiving a W-2 or 1099. This week, I will expand on what happens if the W-2 or 1099 is received, but it is incorrect or is the wrong form altogether.
Do you have any recourse if the W-2 or 1099 has the wrong information on it when you receive it? Yes, you do. Remember that the original set of forms doesn’t have to be sent in to the appropriate agency, either the Social Security Administration or the Internal Revenue Service, until February 28. Since you normally receive the form in January, the employer has plenty of time to correct administrative errors such as an incorrect street address or wrong zip code. Those types of errors are easy to correct and most employers are quite accommodating.
However, what can you do if the error is of the dollar amount variety, i.e. gross wages is wrong or the federal or state withholding is wrong? Can these errors be fixed? These errors are a horse of a different color. In the federal payroll reporting system within which all employers operate, the dollar amounts that are summarized on your W-2 have been reported quarterly to the Internal Revenue Service. The amounts withheld from your paycheck for federal withholding, Social Security, and Medicare taxes have been paid over to the IRS throughout the year.
When you receive your W-2, it is a summary of the activity that occurred under your Social Security number throughout the entire year. If you believe there is an error in the gross wages reported or in the amount of federal tax withheld from your wages and you are correct, this can be a total nightmare for the employer. The company has already paid in the amounts withheld from your checks as well as the amounts it had to match for Social Security and Medicare taxes. The company has already filed government forms, usually a Form 941, that breaks down the amounts paid between federal withholding, Social Security and Medicare taxes.
If you are correct, the employer may have to amend some of those reports filed and either pay in more taxes or ask for a refund. If the changes result in a balance due, the penalties can be severe. Either way, it can be a mess, so you will be expected to solidly prove your point. The best proof is showing the error with check stubs and working with the employer.
But what happens if the form that is received is the wrong form? You receive a 1099 instead of a W-2, or vice versa. 1099s are issued to taxpayers who are considered subcontractors. Subcontractors are responsible for paying their own regular tax and Social Security and Medicare tax without the benefit of having any tax withheld from their checks. W2s are issued to taxpayers who are employees. Employees have Social Security and Medicare tax withheld from their checks and may have regular federal and state tax withheld as well.
There are immense income tax implications of being taxed as a subcontractor as opposed to an employee. These implications are not all negative, they just are immense. First, non-reimbursed expenses of an employee are deducted as an itemized deduction on Schedule A. They are only deducted after reducing the expenses by 2% of income, and then what is left is only deductible if the taxpayer is able to itemize his deductions. These two factors, in most instances, will negate much of the deduction.
Expenses for a subcontractor, however, are deducted directly against the 1099 income. There is no 2% reduction and the taxpayer does not have to itemize to get the deduction.
The second implication is the treatment of Social Security and Medicare tax. Employees pay their Social Security and Medicare tax via withholding from their paycheck. A total of 7.65% of gross wages is withheld and the employer matches this 7.65% and sends the total on to the IRS. It’s somewhat of a seamless transaction.
Subcontractors, on the other hand, start out with their gross income, reduce that figure by all of their expenses, and then calculate Social Security and Medicare tax of 15.3% of that net figure. This tax is then added to their regular tax on their federal tax return and sent in as part of their total tax return calculation.
The bottom line is the tax return of a subcontractor with a 1099 can be more complicated than the tax return of an employee with a W-2.
One of the questions I started this article with was: “What are your options if a 1099 is received instead of a W-2 or vice versa?” The IRS has a set procedure in these instances, and I will discuss that next week. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent. He owns Action
Tax Service on Northland Drive in Rockford. Contact
Jerry through his website at www.actiontaxservice.com.