Penalties

The following penalties generally apply to the person required to file Form W-2. The penalties apply to paper filers as well as to magnetic media/electronic filers.

Use of a reporting agent or other third-party payroll service provider does not relieve an employer of the responsibility to ensure that Forms W-2 are furnished to employees and filed correctly and on time.

Failure to file correct information returns by the due date.   If you fail to file a correct Form W-2 by the due date and cannot show reasonable cause, you may be subject to a penalty. The penalty applies if you:

• Fail to file timely,
• Fail to include all information required to be shown on Form W-2,
• Include incorrect information on Form W-2,
• File on paper when you were required to file on magnetic media,
• Report an incorrect TIN,
• Fail to report a TIN, or
• Fail to file paper Forms W-2 that are machine readable.

The amount of the penalty is based on when you file the correct Form W-2. The penalty is:

• $15 per Form W-2 if you correctly file within 30 days (by March 30 if the due date is February 28); maximum penalty $75,000 per year ($25,000 for small businesses, defined later).
• $30 per Form W-2 if you correctly file more than 30 days after the due date but by August 1; maximum penalty $150,000 per year ($50,000 for small businesses).
• $50 per Form W-2 if you file after August 1 or you do not file required Forms W-2; maximum penalty $250,000 per year ($100,000 for small businesses).

If you do not file corrections and you do not meet any of the exceptions to the penalty stated below, the penalty is $50 per information return.

Exceptions to the penalty.   The following are exceptions to the failure to file penalty:

1. The penalty will not apply to any failure that you can show was due to reasonable cause and not to willful neglect. In general, you must be able to show that your failure was due to an event beyond your control or due to significant mitigating factors. You must also be able to show that you acted in a responsible manner and took steps to avoid the failure.
2. An inconsequential error or omission is not considered a failure to include correct information. An inconsequential error or omission does not prevent or hinder the SSA/IRS from processing the Form W-2, from correlating the information required to be shown on the form with the information shown on the payee's tax return, or from otherwise putting the form to its intended use. Errors and omissions that are never inconsequential are those relating to:
   • A TIN,
   • A payee's surname, and
   • Any money amounts.
3. De minimus rule for corrections. Even though you cannot show reasonable cause, the penalty for failure to file correct Forms W-2 will not apply to a certain number of returns if you:
   • Filed those Forms W-2 on or before the required filing date,
   • Either failed to include all the information required on the form or included incorrect information, and
   • Filed corrections of these forms by August 1.

If you meet all the conditions above, the penalty for filing incorrect Forms W-2 will not apply to the greater of 10 Forms W-2 or ½ of 1% of the total number of Forms W-2 you are required to file for the calendar year.

Lower maximum penalties for small businesses.   For purposes of the lower maximum penalties shown in parentheses above, you are a small business if your average annual gross receipts for the 3 most recent tax years (or for the period you were in existence, if shorter) ending before the calendar year in which the Forms W-2 were due are $5 million or less.

Intentional disregard of filing requirements.   If any failure to file a correct Form W-2 is due to intentional disregard of the filing or correct information requirements, the penalty is at least $100 per Form W-2 with no maximum penalty.

Failure to furnish correct payee statements.   If you fail to provide correct payee statements (Forms W-2) to your employees and you cannot show reasonable cause, you may be subject to a penalty. The penalty applies if you fail to provide the statement by January 31, you fail to include all information required to be shown on the statement, or you include incorrect information on the statement.

The penalty is $50 per statement, no matter when the correct statement is furnished, with a maximum of $100,000 per year. The penalty is not reduced for furnishing a correct statement by August 1.

Exception.   An inconsequential error or omission is not considered a failure to include correct information. An inconsequential error or omission cannot reasonably be expected to prevent or hinder the payee from timely receiving correct information and reporting it on his or her income tax return or from otherwise putting the statement to its intended use. Errors and omissions that are never inconsequential are those relating to:

• A dollar amount,
• A significant item in a payee's address, and
• The appropriate form for the information provided (i.e., whether the form is an acceptable substitute for the official IRS form).

Intentional disregard of payee statement requirements.   If any failure to provide a correct payee statement (Form W-2) to an employee is due to intentional disregard of the requirements to furnish a correct payee statement, the penalty is at least $100 per Form W-2 with no maximum penalty.

Civil damages for fraudulent filing of Forms W-2.   If you willfully file a fraudulent Form W-2 for payments you claim you made to another person, that person may be able to sue you for damages. You may have to pay $5,000 or more.

Specific Instructions for Form W-2

How to complete Form W-2.   Form W-2 is a six-part form. Please ensure that all copies are legible. Send Copy A to the SSA; Copy 1 to the state, city, or local tax department; and Copies B, C, and 2 to the employee. Keep Copy D, and a copy of Form W-3, with your records for 4 years.

Type the entries on Form W-2 using dark black ink in 12-point Courier font, if possible. Because Copy A is read by machine, handwritten entries or the use of inks other than black to make entries on the form hinder processing by the SSA. Do not use script type, inverted font, italics, or dual case alpha characters. It is important that entries in the boxes do not cross one or more of the vertical or horizontal lines that separate the boxes. Please do not erase, whiteout, or strike over an entry. Make all dollar entries without the dollar sign and comma but with the decimal point (00000.00). Show the cents portion of the money amounts. If a box does not apply, leave it blank.

Send the whole Copy A page of Form W-2 with Form W-3 to the SSA even if one of the Forms W-2 is blank or void. Do not staple Forms W-2 together or to Form W-3. Also, if possible, please file Forms W-2 either alphabetically by employees' last names or numerically by employees' SSNs. This will help the SSA locate specific forms.

Calendar year basis.   The entries on Form W-2 must be based on wages paid during the calendar year. Use Form W-2 for the correct tax year. For example, if the employee worked from December 21, 2002, through January 3, 2003, and the wages for that period were paid on January 5, 2003, include those wages on the 2003 Form W-2.

Multiple forms.   If necessary, you can issue more than one Form W-2 to an employee. For example, you may need to report more than four coded items in box 12 or you may want to report other compensation on a second form. If you issue a second Form W-2, complete boxes b, c, d, e, and f with the same information as on the first Form W-2. Show any items that were not included on the first Form W-2 in the appropriate boxes. Also, see the TIP under Box 12 - Codes on page 8.

Do not report the same Federal tax data to the SSA on more than one Copy A.

Box a - Control number.   You may use this box to identify individual Forms W-2. Make certain that entries do not cross over into the form identification box (22222). You do not have to use this box.

Void.   Check this box when an error is made on Form W-2 and you are voiding it because you are going to complete a new Form W-2. Be careful not to include any amounts shown on Void forms in the totals you enter on Form W-3. See Corrections on page 3.

Box b - Employer identification number.   Show the employer identification number (EIN) assigned to you by the IRS (00-0000000). This should be the same number that you used on your Federal employment tax returns (Form 941, 943, or CT-1). Do not use a prior owner's EIN. If you do not have an EIN when filing Forms W-2, enter Applied For in box b, not your SSN. You can get an EIN by filing Form SS-4, Application for Employer Identification Number. Also see Agent reporting on page 3.

Box c - Employer's name, address, and ZIP code.   This entry should be the same as shown on your Form 941, 943, or CT-1. Also see Agent reporting on page 3.

Box d - Employee's social security number.   Enter the number shown on the employee's social security card. If the employee does not have a card, he or she should apply for one by completing Form SS-5, Application for a Social Security Card. If the employee has applied for a card but the number is not received in time for filing, enter Applied For in box d.

Ask the employee to inform you of the number and the exact way his/her name is printed on the card when it is received. Then correct your previous report by filing Form W-2c showing the employee's SSN. Also show the employee's name as shown on the card. If the employee needs to change his or her name from that shown on the card, the employee should call the SSA at 1-800-772-1213.

Boxes e and f - Employee's name and address.   Enter the name as shown on the employee's social security card (first, middle initial, last). If the name does not fit, you may show first name initial, middle initial, and last name (and ignore the vertical line). If the name has changed, the employee must get a corrected card from any SSA office. Use the name on the original card until you see the corrected one. Do not show titles or academic degrees, such as Dr., RN, or Esq., at the beginning or end of the employee's name.

Include in the address the number, street, apartment or suite number, or P.O. box number if mail is not delivered to a street address. For a foreign address, give the information in the following order: city, province or state, and country. Follow the country's practice for entering the postal code. Do not abbreviate the country name.

Third-party payers of sick pay filing third-party sick pay recap Forms W-2 and W-3 must enter Third-Party Sick Pay Recap in place of the employee's name in box e. See Sick Pay Reporting in section 6 of Pub. 15-A.

Box 1 - Wages, tips, other compensation.   Show the total wages, tips, and other compensation, before any payroll deductions, you paid your employee during the year. Do not include elective deferrals, except section 501(c)(18) contributions. Include the following:

1. Total wages, prizes, and awards paid to employees during the year. See Calendar year basis on this page.
2. Total noncash payments, including certain fringe benefits. See Fringe benefits on page 4.
3. Total tips reported by the employee to the employer (not allocated tips).
4. Certain employee business expense reimbursements (see Employee business expense reimbursements on page 4).
5. The cost of accident and health insurance premiums for 2% or more shareholder-employees paid by an S corporation.
6. Taxable benefits from a section 125 (cafeteria) plan (i.e., employee chooses cash).
7. Employee contributions to an Archer MSA.
8. Employer contributions to an Archer MSA if includible in the income of the employee. See Archer MSA on page 3.
9. Employer contributions for qualified long-term care services to the extent that such coverage is provided through a flexible spending or similar arrangement.
10. Group-term life insurance in excess of $50,000. See Group-term life insurance on page 5.
11. Unless excludable under an educational assistance program (see page 4), payments for non-job-related education expenses or for payments under a nonaccountable plan. See Pub. 508.
12. The amount includible as wages because you paid your employee's share of taxes. See Employee's taxes paid by employer on page 4.
13. All other compensation, including certain scholarship and fellowship grants (see page 5). Other compensation is amounts you pay your employee from which Federal income tax is not withheld. You may show other compensation on a separate Form W-2. See Multiple forms on this page.
14. Distributions to an employee or former employee from a nonqualified deferred compensation plan (including a rabbi trust) or a nongovernmental section 457 plan.
15. Payments to statutory employees that are subject to social security and Medicare taxes but not subject to Federal income tax withholding must be shown in box 1 as other compensation. See Box 13, Statutory employee, on page 9.

Box 2 - Federal income tax withheld.   Show the total Federal income tax withheld from the employee's wages for the year (do not reduce by any advance EIC payments made to the employee). Also include the 20% excise tax withheld on excess parachute payments. See Golden parachute payments on page 5.

Box 3 - Social security wages.   Show the total wages paid (before payroll deductions) subject to employee social security tax but not including social security tips and allocated tips. (See Box 7 and Box 8 on page 8.) Generally, noncash payments are considered wages. Include employee business expense reimbursements reported in box 1. If you paid the employee's share of social security and Medicare taxes rather than deducting them from wages, see Employee's taxes paid by employer on page 4. The total of boxes 3 and 7 cannot exceed $84,900 (2002 maximum social security wage base).

Also, include elective deferrals to certain qualified cash or deferred compensation arrangements and to retirement arrangements described in box 12, in codes D, E, F, G, and S, even though the deferrals are not includible in box 1. Amounts deferred under a nonqualified or section 457 plan must be included in boxes 3 and/or 5 as social security and/or Medicare wages as of the later of when the services giving rise to the deferral are performed or when there is no substantial forfeiture risk of the rights to the deferred amount. Include elective and nonelective deferrals for purposes of section 457 plans.
Also include in box 3:

• Cost of group-term life insurance over $50,000 included in box 1. See Group-term life insurance on page 5.
• Cost of accident and health insurance premiums for 2% or more shareholder-employees paid by an S corporation, but only if not excludable under section 3121(a)(2)(B).
• Employee and nonexcludable employer contributions to an MSA. See Archer MSA on page 3.
• Employee contributions to a SIMPLE retirement account. See SIMPLE retirement account on page 5.
• Adoption benefits. See Adoption benefits on page 3.

Box 4 - Social security tax withheld.   Show the total employee social security tax (not your share) withheld, including social security tax on tips. Do not reduce this amount by any advance EIC payments made to the employee. For 2002, the amount should not exceed $5,263.80 ($84,900 × 6.2%). Include only taxes withheld (or paid by you for the employee) for 2002 wages and tips. If you paid your employee's share, see Employee's taxes paid by employer on page 4.

Box 5 - Medicare wages and tips.   The wages and tips subject to Medicare tax are the same as those subject to social security tax (boxes 3 and 7), except that there is no wage base limit for Medicare tax. Enter the total Medicare wages and tips in box 5. Be sure to enter tips the employee reported even if you did not have enough employee funds to collect the Medicare tax for those tips. See Box 3 on page 7 for payments to report in this box. If you paid your employee's share of taxes, see Employee's taxes paid by employer on page 4.

If you are a Federal, state, or local agency with employees paying only the 1.45% Medicare tax, enter the Medicare wages in this box. See Government employers on page 5.

Example of how to report social security and Medicare wages.   You paid your employee $140,000 in wages. Enter in box 3 (social security wages) 84900.00 but enter in box 5 (Medicare wages and tips) 140000.00. There is no limit on the amount reported in box 5. If the amount of wages paid was $84,900 or less, the amounts entered in boxes 3 and 5 would be the same.

Box 6 - Medicare tax withheld.   Enter the total employee Medicare tax (not your share) withheld. Include only tax withheld for 2002 wages and tips. Do not reduce this amount by any advance EIC payments made to the employee. If you paid your employee's share of the taxes, see Employee's taxes paid by employer on page 4.

Box 7 - Social security tips.   Show the tips the employee reported to you even if you did not have enough employee funds to collect the social security tax for the tips. The total of boxes 3 and 7 should not be more than $84,900 (the maximum social security wage base for 2002). Report all tips in box 1 along with wages and other compensation.

Box 8 - Allocated tips.   If you are a large food or beverage establishment, show the tips allocated to the employee. (See the Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.) Do not include this amount in boxes 1, 3, 5, or 7.

Box 9 - Advance EIC payment.   Show the total paid to the employee as advance earned income credit (EIC) payments.

Box 10 - Dependent care benefits.   Show the total dependent care benefits under a dependent care assistance program (section 129) paid or incurred by you for your employee. Include the fair market value (FMV) of employer-provided or employer-sponsored day-care facilities and amounts paid or incurred in a section 125 (cafeteria) plan. Report all amounts paid or incurred including those in excess of the $5,000 exclusion. This may include (a) the FMV of benefits provided in kind by the employer; (b) an amount paid directly to a day-care facility by the employer or reimbursed to the employee to subsidize the benefit; or (c) benefits from the pre-tax contributions made by the employee to a section 125 dependent care flexible spending account. Include any amounts over $5,000 in boxes 1, 3, and 5. For more information, see Pubs. 15-A and 15-B.

Box 11 - Nonqualified plans.   Show distributions to an employee from a nonqualified plan or a nongovernmental section 457 plan. Also report these distributions in box 1. Make only one entry in this box. State and local agencies must report distributions on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., not in box 1 of Form W-2.

If you did not make distributions this year, show deferrals (plus earnings) under a nonqualified or any section 457 plan that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. Do not report in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services.

If you made distributions and are also reporting deferrals in box 3 and/or 5, do not complete box 11. See Pub. 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and Form SSA-131, Employer Report of Special Wage Payments, for instructions on reporting these and other kinds of compensation earned in prior years. However, do not file Form SSA-131 if contributions and distributions occur in the same year and the employee will not be age 62 or older by the end of that year.

The purpose of box 11 is for the SSA to determine if any part of the amount reported in box 1 or boxes 3 and/or 5 was earned in a prior year. The SSA uses this information to verify that they have properly applied the social security earnings test and paid the correct amount of benefits.

Unlike qualified plans, nonqualified deferred compensation plans do not meet the qualification requirements for tax-favored status. Nonqualified plans include those arrangements traditionally viewed as deferring the receipt of current compensation. Accordingly, welfare benefit plans, stock option plans, and plans providing dismissal pay, termination pay, or early retirement pay are not nonqualified plans.

Report distributions from nonqualified or section 457 plans to beneficiaries of deceased employees on Form 1099-R, not on Form W-2.

Military employers must report military retirement payments on Form 1099-R.

Box 12 - Codes.   Complete and code this box for all items described below. Do not report in box 12 any items that are not listed as codes A-V. Also, do not report in box 12 section 414(h)(2) contributions (relating to certain state or local government plans). Instead, use box 14 for these items and any other information you wish to give your employee. For example, union dues and uniform payments may be reported in box 14.

On Copy A (Form W-2), do not enter more than four items in box 12. If more than four items need to be reported in box 12, use a separate Form W-2 to report the additional items (but enter no more than four items on each Copy A (Form W-2)). On all other copies of Form W-2 (Copies B, C, etc.), you may enter more than four items in box 12. See also Multiple forms on page 7.

Use the IRS code designated below for the item you are entering followed by the dollar amount for that item. Even if only one item is entered, you must use the IRS code designated for that item. Enter the code using a capital letter. Leave at least one space blank after the code, and enter the dollar amount on the same line. Use decimal points but not dollar signs or commas. For example, if you are reporting $5,300.00 in elective deferrals to a section 401(k) plan, the entry would be D 5300.00 (not A 5300.00 even though it is the first or only entry in this box). Report the IRS code to the left of the vertical line in boxes 12a-d and money amount to the right of the vertical line.

See the Form W-2 Reference Guide for Box 12 Codes on page 12. See the detailed instructions below for each code.

Code A - Uncollected social security or RRTA tax on tips.   Show the employee social security or Railroad Retirement Tax Act (RRTA) tax on all the employee's tips that you could not collect because the employee did not have enough funds from which to deduct it. Do not include this amount in box 4.

Code B - Uncollected Medicare tax on tips.   Show the employee Medicare tax or RRTA Medicare tax on tips that you could not collect because the employee did not have enough funds from which to deduct it. Do not include this amount in box 6.

Code C - Cost of group-term life insurance over $50,000.   Show the taxable cost of group-term life insurance coverage over $50,000 provided to your employee (including a former employee). See Group-term life insurance on page 5. Also include it in boxes 1, 3 (up to the social security wage base), and 5.

Codes D through H and S.   Use these codes to show deferrals made to the plans listed. Do not report amounts for other types of plans. See below for an example of reporting elective deferrals to a section 401(k) plan.

The amount reported as elective deferrals is only the part of the employee's salary (or other compensation) that he or she did not receive because of the deferrals. Only elective deferrals should be reported in box 12 for all coded plans, except, when using code G for section 457(b) plans, include both elective and nonelective deferrals.

The following are not elective deferrals and may be reported in box 14, but not in box 12:

• Nonelective employer contributions made on behalf of an employee.
• After-tax contributions, such as voluntary contributions to a pension plan that are deducted from an employee's pay.
• Required employee contributions.
• Employer matching contributions.

If any elective deferrals, salary reduction amounts, or nonelective contributions to a section 457(b) plan during the year are makeup amounts under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) for a prior year, you must enter the prior year contributions separately. Beginning with the earliest year, enter the code, the year, and the amount. For example, elective deferrals under USERRA to a section 401(k) plan are reported in box 12 as follows:

D 00 2250.00, D 01 1250.00. The 2002 contribution does not require a year designation; enter it as D 7000.00. Report the code (and year for prior year USERRA contributions) to the left of the vertical line in boxes 12a-d.

Code D - Elective deferrals to a section 401(k) cash or deferred arrangement.   Also show deferrals under a SIMPLE retirement account that is part of a section 401(k) arrangement.

Code E - Elective deferrals under a section 403(b) salary reduction agreement.  

Code F - Elective deferrals under a section 408(k)(6) salary reduction SEP.  

Code G - Elective deferrals and employer contributions (including nonelective deferrals) to a section 457(b) deferred compensation plan   for employees of state and local governments or tax-exempt organizations. Do not report section 457(f) amounts or amounts deferred under section 457(b) that are subject to a substantial risk of forfeiture.

Code H - Elective deferrals to a section 501(c)(18)(D) tax-exempt organization plan.   Be sure to include this amount in box 1 as wages. The employee will deduct the amount on his or her Form 1040.

Example of reporting elective deferrals to a section 401(k) plan.   For 2002, Employee A elected to defer $11,300 to a section 401(k) plan and made a voluntary after-tax contribution of $600. In addition, the employer, on A's behalf, made a qualified nonelective contribution of $1,000 to the plan and a nonelective profit-sharing employer contribution of $2,000.

The total elective deferral of $11,300 is reported in box 12 with code D (D 11300.00). Even though the 2002 limit for elective deferrals is $11,000, the employer must report the total amount of $11,300 in box 12. The excess is not reported in box 1. Report the excess deferrals and earnings on Form 1099-R.

The $600 voluntary after-tax contribution may be reported in box 14 (this is optional) but not in box 12. The $1,000 nonelective contribution and the $2,000 nonelective profit-sharing employer contribution are not required to be reported on Form W-2, but may be reported in box 14.

Check the Retirement plan checkbox in box 13.

Code J - Nontaxable sick pay.   Show any sick pay not includible in income (and not shown in boxes 1, 3, and 5) because the employee contributed to the sick pay plan.

Code K - 20% excise tax on excess golden parachute payments.   If you made excess golden parachute payments to certain key corporate employees, report the 20% excise tax on these payments. If the excess payments are considered wages, also report the 20% excise tax as income tax withheld in box 2.

Code L - Substantiated employee business expense reimbursements.   Use this code only if you reimbursed your employee for employee business expenses using a per diem or mileage allowance and the amount you reimbursed exceeds the amount treated as substantiated under IRS rules. (See Employee business expense reimbursements on page 4.)

Report only the amount treated as substantiated (i.e., the nontaxable part). In box 1, include the part of the reimbursement that is more than the amount treated as substantiated.

Code M - Uncollected social security or RRTA tax on cost of group-term life insurance over $50,000 (for former employees).   If you provided your former employees (including retirees) more than $50,000 of group-term life insurance coverage for periods during which an employment relationship no longer exists, enter the amount of uncollected social security or RRTA tax on the coverage in box 12. Also see Group-term life insurance on page 5.

Code N - Uncollected Medicare tax on cost of group-term life insurance over $50,000 (for former employees).   If you provided your former employees (including retirees) more than $50,000 of group-term life insurance coverage for periods during which an employment relationship no longer exists, enter the amount of uncollected Medicare tax or RRTA Medicare tax on the coverage in box 12. Also see Group-term life insurance on page 5.

Code P - Excludable moving expense reimbursements paid directly to employee.   Show the total moving expense reimbursements you paid directly to your employee for qualified (deductible) moving expenses. See Moving expenses on page 5.

Code R - Employer contributions to an Archer MSA.   Show any employer contributions to an Archer MSA. See Archer MSA on page 3.

Code S - Employee salary reduction contributions under a section 408(p) SIMPLE.   Show deferrals under a section 408(p) salary reduction SIMPLE retirement account. However, if the SIMPLE is part of a section 401(k) arrangement, use code D. If you are reporting prior year contributions under USERRA, see the TIP above Code D on this page.

Code T - Adoption benefits.   Show the total you paid or reimbursed for qualified adoption expenses furnished to your employee under an adoption assistance program. Also include adoption benefits paid or reimbursed from the pre-tax contributions made by the employee to a section 125 (cafeteria) plan. However, do not include adoption benefits forfeited from a section 125 (cafeteria) plan. Report all amounts including those in excess of the $10,000 exclusion.

Code V - Income from the exercise of nonstatutory stock option(s).   Show the spread (i.e., fair market value of stock over the exercise price of option(s) granted to your employee with respect to that stock) from your employee's (or former employee's) exercise of nonstatutory stock option(s). Include this amount in boxes 1, 3 (up to the social security wage base), and 5. (Use of this code is optional for 2002.)

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