Common mistakes on W-2, W-4 & 941 forms.

• Author: Langer, Jerri L.S.
• Position: PayrollTaxes

If you've launched a new business for yourself or a client, you know the paperwork needed to set up payroll for the first time. But do you know the pitafalls to avoid? Poor or missing employee records can lead to incorrect payroll filings and incorrect filings could generate substantial liability for the employer. Here are some bits of advice I shared recently as a panelist on Tax Talk Today, the IRS' monthly live Internet broadcast.

ESTABLISHING PAYROLL RECORDS

The payroll record serves as an information source for all other employee documents, such as the W-2 Wage and Tax Statement. So it's critical that essential details, such as the new employee's name, Social Security number and withholding allowances, are entered accurately. Have someone double-check those entries.

Though primarily used to establish federal income tax withholding, the W-4 is often used to establish a payroll record. Request a W-4 from all new hires. A W-4 remains valid until replaced by the employee, with one exception--a W-4 requesting exemption from withholding needs to be renewed each year. Remind all employees to update their W-4s annually.

WORK WITH EMPLOYEES

Active communication with employees can avoid incomplete, altered, unsigned or otherwise invalid W-4s. Invalid forms are treated the same as no form at all: "single" with "0" allowances.

Remember that invalid W-4s differ from "questionable" W-4s, those that contain more than 10 withholding allowances or that claim exemption from withholding where wages are normally more than $200 per week. A questionable W-4 is filed with the IRS along with Form 941.

Either situation probably results from misunderstanding and can be resolved with better communication. Granted, employers can't serve as tax consultants. But they can alert employees to the new withholding calculator on the IRS website--it works wonders in getting accurate W-4s.

Special W-4 rules apply for non-U.S. residents who perform services in the United States. And employers with global staffs should read IRS Publication 15 (Circular E).

CHECK W-2 INFORMATION

Sloppy practices can be a key source of "mismatch" or "v" letters from the Social Security Administration. Here are some ways to avoid problems:

* Examine the employee's Social Security card--make sure the name and number match the information on file and on the W-4. Employers can ask to see the employee's card, but can't require it.

* Verify information with the SSA by calling (800) 772-6270.

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