Avoiding W-2, W-3, and 1099 Mistakes in 2023

Accuracy is important, and this is doubly true when submitting your company’s payroll at the end of the year, but with so many forms to keep track of, mistakes are hard to avoid. The start of a new year is the perfect time to start new practices to ensure that your forms are in order to best prepare for next year end. Here are a few ways to prevent costly errors on your W-2, W-3, and 1099 forms.

Common W2 and 1099 Mistakes

Over the years, the IRS and SSA have made note of the many mistakes they have seen and those that should be avoided on all tax forms each year, ranging from simple typos to full-blown misreporting. In fact, most common mistakes revolve around small inconsistencies on the reporting forms, but can lead to large problems down the line.

When filing 1099s, make sure you’ve reported your business expenses in addition to the usual information. While the IRS won’t dock you for giving them more money than you owe, your bank account won’t thank you. Items you’ll want to account for include new equipment, miles driven, and a percentage of your building’s lease.

Filing W-2s for the wrong year is another common mistake the Social Security Administration looks for. This year, you’ll use a 2023 W-2 Form to file for the 2022 tax year. Remember as well that both your W-2 forms and your W-3 form are due to the SSA at the same time.

A few other common—and easily preventable payroll mistakes include the following mishaps:

• Filing late
• Using the wrong form or wrong box on a form
• Reporting the wrong business designation
• Incorrectly filling out retirement information
• Incorrectly reporting total earnings
• Using a copied (not purchased) form or one from IRS.gov
• Minor formatting (periods vs. commas, employee names, etc.)
• Incorrect taxpayer identification number (TIN)
• Submitting handwritten forms
• Sending Forms W-2 to the IRS instead of the SSA
• Filing paper 1099s when filing electronically is required
• Not filing at all when an information return is required

As you’ve probably noticed, practicing common sense and basic proofreading should prevent most potential payroll mistakes during an already busy time of year.

General Prevention

The majority of mistakes you’ll run into on any of the aforementioned forms are preventable by reviewing your forms after you’ve completed them with your employees. This will be a daunting task for larger firms—but if it’s a feasible task for your company to perform, consider it. The fewer forms that come back to you, the less work you’ll have to do later.

Another equally simplistic way to keep your company from undergoing an audit is by submitting your forms on time. You don’t lose points for sending in your W-2s, W-3s, and 1099s early, and doing so will buy you that much more time to correct them if the occasion arises. It also prevents making careless errors if you are rushing too close to the deadline.

You should also ensure that your employees keep you up to date on pertinent payroll information. Check in with your employees at the beginning of every tax year before you process payroll to verify the following things:

• Household status
• Employee status (exempt or otherwise)
• Extenuating circumstances
• Contact information (address, phone number, etc.)

Preparing W-2s and W-3s

The main issues people tend to run into with W-2s and W-3s lie in the formatting and reporting, which are things you can easily address by double-checking your forms before sending them out.

However, one surprisingly common issue that affects both of these forms is a mix-up in destination. While 1099s go directly to the IRS for review, your W-2s and W-3s zip off to the Social Security Administration (SSA). Again, you’ll need to mail them at the same time.

This can create a bit of a logistical issue since your employees are bound to leave their W-2s to the last minute, and the W-3 is a bit contingent on the numbers reported on the W-2s. You can overcome this problem by setting a strict due-date for the W-2s, but you’re still liable to run into some edge cases toward the end of the reporting period.

It’s also worth noting that you should supply your employees with W-2s as soon as possible. The more time they have to enter the pertinent information on their income tax return, the more time you’ll have to review or correct any changes.

1099s

The IRS has rolled out a few new changes to 1099 compliance and forms in recent years. First off is the introduction of the 1099-NEC (Non-Employee Compensation) form, which replaces 1099-MISC for many contractors. Both are two of the most common 1099 forms. Form 1099-NEC reports payments to non-employees such as independent contractors, freelancers, gig workers, and attorneys, while Form 1099-MISC is designated to report payments such as rent, awards, royalties, and other income.

In addition, instead of having annual forms published, the IRS will only update the 1099-NEC and 1099-MISC forms as needed, so you will have to fill in the last two digits of the tax filing year. Sample forms for the current year are pictured below:

One final note on proper 1099 preparation compliance: If you are filing 250 or more of any one type of 1099 form, you must file electronically.

As previously mentioned, you can write off your business expenses using 1099s—but there’s a caveat: the IRS tends to look down on situations in which a part-business, part-personal item (e.g., a phone or a computer) shows up as an all-business expense. For example, if you use your shiny new iPhone for both business-related calls and research in addition to FaceTiming your grandmother on the weekend, you technically can’t report that iPhone’s entire cost as a business expense. However, the line between business and pleasure can get pretty blurry. For any doubts regarding the disparity between your business expenses versus your personal expenses, consider checking in with a payroll or tax consultant before submitting your 1099 this tax season—audits for 1099 users are an especially irritating (and costly) hindrance.

The American Rescue Plan included a provision requiring third-party settlement organizations (TPSOs) to issue Form 1099-K to all taxpayers for whom they processed at least $600 in payments for the calendar year. Due to concerns about the implementation of this change, the IRS has announced that the new threshold will be delayed by one year to include payments made after 2022.

Want to learn more on 1099 compliance and reporting requirements? Watch our latest webinar recording on Acing 1099s: Best practices to meet 1099 requirements and deadlines.

Correcting W-2 and 1099 Mistakes

Even with getting a head start and being as diligent as possible, human error and mistakes can still happen.  Don’t think you can ignore small errors, however: The IRS can issue penalties if forms have significant uncorrected errors. What happens if a mistake is reported to you?

• Verify the legitimacy before issuing a new form. If it’s an email request for a correction or lost W-2 form, most important is to verify the identity of the employee making the request. Especially early on at tax time, fraud attempts are high to try to get the sensitive information from employees’ W-2 forms in order to file a fraudulent return. It never hurts to take this extra step.
• Time is of the essence. Forms are typically due to employees and contractors by the end of January, leaving them until mid-April to file or extend their return. An error on a W-2 or 1099 form often also impacts the accuracy of the taxpayer’s income tax return, so they need the corrected information sooner rather than later.
• Send the corrected form to the IRS/SSA.
  • W-2s: Complete and file a Form-W2c (Corrected Wage and Tax Statement) with the SSA and give a copy to the employee.
  • 1099s: At the top of the 1099 forms is a box to check “corrected” (do not select “void” for this instance). There are different steps for if it was paper or electronically filed. For paper forms, Type 1 errors are for incorrect money amounts, codes, or checkboxes while Type 2 errors are for a missing payee name or a missing or incorrect payee taxpayer identification number (TIN). You will also have to prepare a new transmittal Form 1096 and include it with your mailing.

Every tax season introduces a bevy of new accompanying challenges. If you’re looking for a seasoned payroll company to catch your form mistakes, give Abacus Payroll a call at (856) 667-6225 or visit our website today!