Question

Define each, explain the purpose, and who uses them:
W-2
W-3
Also describe the steps to complete each form.

Answer 1

Answer :

W-2 form

W - 2 form is also know as “Wage and Tax Statement”. This form is for an employer who is required to send to each employee and to the Internal Revenue Service (IRS) at the end of the year. A W-2 form reports the employee’s annual wages and the amount of taxes withheld from their paychecks. A W-2 employee is someone whose employer deducts taxes from their paychecks and submits this information to the government through W-2 form.The Internal Revenue Service (IRS) uses W-2 forms to track the employee’ s tax obligation.

Purpose

The purpose of this form is to provide the employee with information that must be included in their income tax form. It also gives the Social Security Administration and the IRS information to verify the employee's income tax return.

Used by

W-2 is used by an employers to report wage and salary information of employees. Here an employer reports the amount of federal, state and other taxes withheld from employee’s paycheck. This information is to be Submitted to Internal Revenue Service (IRS) before January 31.

Steps to Complete form

Lettered field

The lettered fields, located on the left-hand side of the W-2 form, provide basic identification for both the employer and the employee.

An exception is the state ID number, which goes in a numerically labeled box at the bottom of the form, along with the other state and local tax information.

Field a: Employee’s Social Security Number

Nine-digit social security number of the employee for whom this W-2 form is being prepared for.

Field b: Employer Identification Number

An Employer Identification Number (EIN) is the unique nine-digit number that the IRS assigns to businesses. You must have an EIN in order to hire employees.

Field c: Employer’s Name, Address, and ZiP Code.

You need to enter the full, legal name you used when you registered your corporation or LLC. Also the complete address of your business, including the zip code.

Field d: Control Number

The control number identifies each employee’s unique W-2 in the company’s records. The numbers are automatically generated by your company’s payroll processing software.

Field e: Employee’s Name, Address And ZIP code

Make sure you have entered the current address of each employee. You may need to double-check to make sure this information is accurate.

Numbered fields

The numbered fields run in a double column on the right-hand side of the W-2 form and continue across the bottom of the form. Wages and federal tax information is contained in the right-hand columns.

The bottom field displays state and local tax information in a series of horizontal numbered fields. It is divided by a dotted line to provide more than one space for entering information.

If you have employees working for your business in more than one locality or state, you will need to fill out withholdings for each locality, utilising the space on either side of the dotted line.

Field 1: Wages, Tips, Other Compensation

This field reports the total of all your employee’s taxable wages or salary, including bonuses and taxable fringe benefits like group term life insurance. It does not include pre-tax benefits, such as contributions to a 401(k) or health insurance plan.

Field 2: Federal Income Tax Withheld

How much federal income tax you withhold from a given employee’s paycheck is depends on the number of withholding allowances they designated on their W-4 form.

Field 3: Social Security Wages

Only a portion of each employee’s total wages are subject to tax from the Social Security Administration.

Field 4: Social Security Withheld

Employers and employers contribute equally to this tax, paying 6.2 percent each of the employee’s wage up to the allowable threshold amount.

Field 5: Medicare Wages and Tips

The figure you enter in this field reflects the total taxable income each employee earned with your company. Unlike Social Security, there is no maximum threshold.

Field 6: Medicare Tax Withheld

Employers and employees pay matching tax rates into Medicare — 1.45 percent each.

Field 7: Social Security Tips

You include employee’s reported tips in this field. When added to Field 3, the sum should equal the number in Field 1.

Field 8: Allocated Tips

If your business is a large food or beverage establishment, and the amount of tips an employee reported to you fell below the IRS’s approved percentage rate, you may assess additional compensation to your employees in the form of allocated tips.

Unlike any tips reported in Field 7, this sum is not included in the amount of total income reported in Field 1.

Field 9: Advance EIC Payment

This field is a relic of a tax policy that no longer is relevant and should always remain blank.

Field 10: Dependent Care Benefits

You use this field to report income you reimbursed an employee for dependent care expenses, including through a flexible spending account.

Field 11: Nonqualified Plans

This field is where you report any amounts you distributed to your employees from a non-government Section 457 pension plan or a non-qualified deferred compensation plan

This amount should be included as taxable income in Field 1 as well.

Field 12: Deferred Compensation

There are numerous forms of deferred compensation recognized by the IRS, each of which has its own tax code. The W-2 form mandates you to report as many of these forms of compensation as are relevant to your employees in Field 12.

Some of the more common are group term life insurance benefits in excess of the $50,000 worth you can provide as a tax-free benefit and the non-taxable portion of temporary disability or sick pay. The IRS recognizes roughly 30 different forms of deferred compensation.

Field 13: Checkboxes for Statutory Employees, Retirement Plan, and Third Party Sick Pay

In this field, you check any of the three boxes that are relevant to the employee in question.

A statutory employee is someone who works for your company but doesn’t receive compensation in the form of a regular paycheck — for instance, they work 100 percent on commission.
You check “Retirement Plan” if your employees have access to a 401k or 403b at work, which may limit their ability to get tax incentives normally associated with an IRA
”Third Party Sick Pay” refers to compensation your employee received from an outside party, such as an insurance company.

Field 14: Other

You can use this field to report any compensation that doesn’t fall into the other categories listed on the W-2 form.

Field 15: State ID Number

State ID numbers function in much the same way as EINs, to give your business a recognizable identity for tax purposes. The state ID number is only valid in that state.

Field 16: State Wages, Tips, Etc.

This field is where you report the income you paid to the employee that is taxable at the state level.

Field 17: State Income Tax

This field shows the total amount of state income tax you withheld from your employee’s checks over the course of the year.

Field 18: Local Wages, Tips, Etc.

You report all income that is subject to taxation by your locality. This figure may be different than the figure in Field 16.

Field 19: Local Income Tax

If one or more of the localities you do business in requires employees to pay local income tax, this is the field where you report the amount.

Field 20: Locality Name

You’ll enter a brief description of the city or town that withheld taxes.    

W-3 form

W-3 form is known as “Transmittal of Wage and Tax Statement”. W-3 form is a transmittal form with totals for all parts of Form W-2. This Form is send along with the W-2 form to Social Security Administration (SSA) each year to show the total earnings for all W-2 forms. W-3 form is to be submitted along with form W-2 before January 31.

Purpose

Form W-3 is a document used by the IRS and the Social Security Administration (SSA) to summarise and transmit an employer’s W-2 forms.

Used by

W-3 form is used by the IRS and SSA to track the wages, salary, commission, tips, and other compensation employers pay out throughout the year. The form also reports the total income and Federal Insurance Contribution Act (FICA) taxes withheld from employee paychecks.

Steps to complete form

Lettered field

Box a. Optional control number you can use for your own business purposes.

Box b. Kind of Payer. Most businesses check the box labeled "941" for "Kind of Payer". The 941 form is the quarterly wage and tax report form completed by most employers. Other options include a household employer and others.

Kind of employer. Most for-profit businesses check the "none apply" box for "Kind of Employer". The other boxes are for non-profit organizations and federal government employers.

Box c Total number of Forms W-2. Add up the number of W-2 forms you are submitting.

Box d Establishment number helps employers identify different areas of their businesses either by location, subsidiary, or division. For example, you might want to separate out the W-2 forms for different states where employees work.

You must separate out W-2 and W-3 forms for each establishment if you identify establishment numbers in this section, or you can combine all your establishments and submit all W-2 forms together along with one W-3 form.

Numbered fields

The items in the second section (boxes 1 through 19) are the same for both the W-2 and W-3. In the W-3 form, you must give totals for all boxes for all employees.