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W-2s for Your Child Care Business

W2 FormAs the January deadline for issuing W-2s to your employees approaches, you may be interested in a few tips on preparing W-2s and the summary W-3 form. This information applies regardless of what system you use to produce your W-2s.

Payroll Reports

If your accountant is doing W-2s for you or you’re doing them by hand, you’ll need some payroll reports showing both the taxable earnings for each employee as well as the amounts withheld. Using Daycare Payroll Software from Procare, this information appears on the “Employee Earning / Withholding Summary” with all the detail you’ll need in a one-page-per-person format. If you don’t need that much detail, there’s also a single page report that includes all employees called the “Simple Withholdings Summary”.

e-Filing using the EFW2

It’s easy to e-file your federal W-2s using the Social Security Administration (SSA) website. The SSA will assign you an ID number, known as your Business Services Online User ID. Then, in order to e-file, you’ll just need your W-2 data in the proper electronic format.  Ask if the software you use to generate W-2s supports the EFW2 format. If you’re using the Procare W-2 Software, then “Yes”, Procare lets you export to EFW2 format.

Enter the right amount for Social Security & Medicare

You’ll want to adjust withholdings for Social Security and Medicare so they come out to the exact percentages for the year. Just adding together the amounts withheld check by check will typically give you the wrong answer! The correct amount should be the taxable earnings for the entire year multiplied by the rate for that year. For 2012 W-2s that would mean taking the Social Security wages (box 3) multiplied by 0.042 (4.2%) and the Medicare wages (box 7) times 0.0145 (1.45%). If the amount is slightly different from their last pay stub of the year, don’t worry, just make up the difference by adding it to, or subtracting it from, federal income tax withheld (box 2). Most W-2 software will do this for you automatically.

[2013 Editor’s Note: For 2013 Social Security, multiply by 0.062 (6.2%). Also, the 2013 base rate for Medicare is still 1.45%; however, you must withhold an additional 0.9% for wages paid in excess of $200,000. See: IRS Topic 751]

Note: According to the IRS instructions: “For certain members of the clergy and religious workers who are not subject to social security and Medicare taxes as employees, boxes 3 and 5 of Form W-2 should be left blank.”

Reporting Employer Sponsored Health Care

If you are required to (or choose to) report employer provided health coverage on the W-2, you would enter the amount for each person in Box 12 (using Code DD). According to the IRS site, reporting is optional for “Employers required to file fewer than 250 W-2 forms for the preceding calendar year”.

What amount should you include? Again, according to the IRS site: “In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee”.

Although the amount withheld for the employee share of health care is recorded in your payroll software, the employer’s contribution is not; therefore, the amount must be manually entered. If you’re using the Procare W-2 Software, as a starting point you could map the health care withholding to box 12. This would give you the employee’s share; then, manually add to it your employer contribution.

See: IRS: W-2 Reporting of Employer Sponsored Health Coverage

Can I show a Housing Allowance on the W-2?

Yes. According to the  IRS W-2 Instructions for 2012: “You may include a minister’s parsonage and/or utilities allowance in box 14.” If you’re using the Procare W-2 software, you can manually edit box 14 as needed. For information on the rules that apply to ministers and certain other religious workers, see IRS Publication 517.

How many withholdings may I report in box 14 “Other”?

The W-2 form is limited to a maximum of 3 withholdings for box 14 (other withholdings). This is an IRS limitation based on the size of the form. In most cases box 14 is optional; its purpose, according to the IRS instructions, is “for any other information that you want to give to your employee”. If you’re using the Procare Payroll System, consider printing the report called “Employee Earning / Withholding Summary” and include it with the W-2 for each person. This report gives all the detail anyone should need as to what was withheld for each category.

You’ll find all these answers and more at procaresupport.com under Frequently Asked Questions about W-2s.

Until next time, cheers!

-Phil

P.S. You may also like to Follow Me on Twitter.

If you have questions or comments about this article (or suggestions for another article) I’d be pleased to hear from you. Drop me a note at phil@procaresoftware.com.

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