Nobody likes tax time. Let’s be real: Filing your taxes is always sort of stressful – even if you hire an accountant to do it for you. To ease your tax anxiety, it’s important to fill out the proper paperwork and send it at the right time to avoid penalties. This is where the W-2 and W-3 forms come in. The IRS has a series of “W” forms, but the W-2 and W-3 are closely linked for the employer. One is always necessary, while the other may not be.
W-2 and W-3 forms are definitely similar. The main difference lies in their receiver. Copies of a W-2 form go from the employer to the employee. Copies of a form W-3 go from an employer to the Social Security Administration (along with additional copies of W-2s). So how do you file and what's the difference?
Employers use W-3s to report earnings to the Social Security Administration if they’re not filing W-2s electronically.
Anyone who’s ever been an employee of a business has received a W-2 form. This is like a sister to the MISC-1099, which serves contract workers. Before starting work at a new company, employees fill out a W-4 which details all their tax withholdings. This form is then used by an employer to create a W-2. At the end of the year, a W-2 is mailed out to all employees, which lets them know their total earnings for the year and taxes withheld from their paychecks. They can use this to get a refund on their Tax Return. Depending on an employee’s withholding status, they may need to pay the IRS at the end of the year. This is typically more common with 1099 workers, who don’t have taxes withheld in advance.
W-2 forms are a requirement for every employer with employees. The IRS claims employers must report the wages of each employee as long as they:
- Had income tax, Social Security or Medicare taxes withheld.
- Had income tax that would have been withheld, as long as they only claimed one withholding allowance or did not claim an exemption on their W-4.
Public benefits are a saving grace for those who fall below the poverty line. At the end of the day, we all pay into them, and we’re all entitled to collect them under certain circumstances. For example, those over the age of 65 can collect Social Security as long as they’ve paid enough into the system. Those below the poverty line qualify for Medicare. The Social Security Administration needs to know exactly how much employers are paying into the systems, and that’s where a W-3 comes in.
If you’re an employee, you’ve likely never dealt with a W-3 form. This is used strictly by employers. At the end of the year, employers use a W-3 to report the earnings, Medicare wages and Social Security wages of all their employees. This document gets sent to the Social Security Administration no later than February. The catch is that it also has to include the W-2 tax forms of every employee. If you’ve got 10 employees, you need to send in 10 W-2 forms. The totals from all those W-2 forms added up should be equal to what you report on your form W-3.
Employers know that W-2 forms come with a whole lot of copies – six to be exact. So, which is the right one to send along with your W-3? Copy A gets sent to the Social Security Administration, meaning this is what you’ll attach to your W-3. Copy B and C go straight to your employees. They’ll send the former to the IRS and hold onto the latter for their personal records should they ever be audited. Copy D gets filed away in your records just in case you're ever audited.
The final two copies: Copy 1 and Copy 2 are for state or local income tax returns. These go to your employee along with Copy B and C. Employees get two copies of Copy 2 because some may have to file in different states.
It’s pretty easy to get copies of W-2 and W-3 forms. You can buy already printed forms at office supply stores or create them in the Social Security Administration’s “Business Services Online” section. You can also print them out from the IRS website -- just remember these forms have to be scannable. Stick with government websites to get the official forms. If it can’t be read by a machine, you’ll face fines.
The IRS starts processing tax returns in late January, but the quicker you file, the quicker you tend to get a return. There are certain rules as to when an employer must submit a W-2 and W-3 to the proper parties.
Both W-2 and W-3s need to be mailed to the proper parties by January 31. If you fail to file in time, you will incur some fines, which the IRS calculates based on how late your filing is. There’s a $50 penalty per W-2 form mailed within 30 days of the due date (which adds up if you have a lot of employees). The maximum penalty is $536,000 within this window. If you’re 31 or more days date late, the penalty rises to $60 per return with a $1,609,000 maximum. If you mail your return after August 1st, the penalty is increased to $260 per return with a $3,218,500 maximum. Things get even worse if the IRS believes you’ve intentionally withheld W-2 and W-3 forms. In this case, the fine is $530 per return, and there’s no maximum.
Small business owners do get a break on penalties. They’re capped at a lower rate, but still range between $50 and $530 per return. You might also incur penalties for filing forms that aren’t machine readable or have incorrect information.
Previously, almost anyone could get an extension for filing late W-2 and W-3 forms. In recent years, this is not the case. The IRS has flipped the regulation on its head. Today, you need to fill out an extension application, but it isn’t guaranteed. You need to have a legitimate reason behind your extension request.
If you do want to file for an extension, you need to fill out IRS Form 8809 by the January 31 deadline. The extension only gives you 30 days.
Companies typically only send MISC-1099 forms if they’re paying a contractor more than $600 for their work. This isn’t the case for a W-2, which has no minimum filing requirements. Every employer must file a W-2 for an employee, even if they didn’t make enough wages to require them to file a tax return.
On the flip side, employers don’t always need to fill out a W-3 form. This is really only for people filing by mail. If you electronically submit your employee’s W-2 forms to the Social Security Administration and IRS, you don’t need to send a W-3. Online filing is a requirement for anyone with more than 250 employees.