Taxes

A Busy Week: MLK, Inauguration, and the 2020 W-2

January 20, 2021

It's time to be preparing the 2020 W-2 form for your employees. Here's what you need to know before diving into this tedious task.

2020 W2 Image 1 v2

The United States has a lot going on this week.  For starters, we inaugurated our 46th president into office.  In addition, we celebrated Martin Luther King Jr.’s contributions to society.  MLK Day became a fixture in American federal holidays after Ronald Regan made it official in 1983.  Furthermore, King was responsible for many of the major changes to legislation affecting employment to this day.  King fought hard for fair wages, and employers are still striving to create fairness in the workplace. As if we don’t already have enough going on, each year around this time, employers are tasked with sending out earnings and tax information to employees.  They send this information on the W-2 form. 

So, let’s take a look at the 2020 W-2—a little piece of paper that has big ramifications.

The W-2 Form and All Its Glory

Image of troops and ships in Normandy during WW2.

The W-2 form has been around for nearly 80 years.  In fact, as the U.S. was joining forces to fight against the Axis Powers across the ocean, back on home soil the W-2 form was coming to fruition.  This, however, was no coincidence, as the original purpose of the form was to help fund World War II.  The premise was simple: determine how much each worker makes in a year, then take a percentage of that, as a nod to patriotism, of course. While the government intended for the move to be a temporary wartime maneuver, the $36 billion increase in revenue collection in just two short years quickly changed the federal mindset.

As hoped, the W-2 form achieved its goal in the 1940s.  However, due to an astronomical national debt, the impact of the tax collection no longer provides the funds to afford certain things.  Instead, it simply slows the pace at which we are sinking deeper and deeper into the red.

The Good W-2

So, what are some positives of the W-2 form today?  Well, some might say the W-2 form helps facilitate fairness where wages are concerned.  In other words, without it, there would be less transparency to wages, and certain groups of people could unfairly earn more than others for the same work.  While it doesn’t completely eliminate unfair practices, it can help reduce them, when the form is properly utilized.

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From a tax perspective, the W-2 form is good because it provides a way to report a snapshot of all things tax-related in one place.  So, when it’s time to file taxes each year, employees need only provide their W-2 as a starting point.  The W-2 makes it easier for employees to know whether they owe more taxes, or if they will receive a refund, once everything is reconciled.

What’s New on the 2020 W-2

Now, the 2020 W-2 form does have some distinctions from the 2019 version.  However, none of the changes are earthshattering.  In fact, the changes are mostly to wording for clarity, as well as format updates.  Still, there are some items related to this past year’s circumstances that we need to address.

Boxes 1,3, and 5

Let’s start at square one.  As usual, you will use boxes 1, 3, and 5 to report the following:

  • Box 1: Wages, tips, and other compensation
  • Box 3: Social Security wages
  • Box 5: Medicare wages and tips

Besides this, you will also use these boxes to report paid sick leave.  This will make sense to you as you begin to consider the employees who were out due to COVID-related issues.  These wages will have been paid under the Families First Coronavirus Response Act (FFCRA).

Boxes 3, 4, and 7

Image of the 2020 W-2 form.

If you remember, in 2020 employers had the option to defer social security tax payments through December 31st.  So, you may have employees for whom you deferred social security tax.  If that’s the case, then you’ll need to use boxes 3 and/or 7 to report wages subject to Social Security.  Since you did not actually withhold the Social Security tax from those employees, you won’t put anything in box 4.  Therefore, you must catch up that amount in 2021, so you will use Form W-2c to report the withholding. 

Note: you must complete withholding Social Security tax from employees for 2020 by April 31, 2021.

Box 8

Now, box 8 has reworded the tip reporting instructions on the 2020 W-2.

Previously, the 2019 version read, “On Form 4137, you will calculate the social security and Medicare tax owed on the allocated tips shown on your Form(s) W-2 that you must report as income and on other tips you did not report to your employer.”

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Thus, the 2020 version reads, “Use Form 4137 to figure the social security and Medicare tax owed on tips you didn’t report to your employer. Enter this amount on the wages line of your tax return.”

Box 12

Simply, the IRS updated the dollar amounts for box 12. 

Box 14

Do you remember how you reported sick leave in boxes 1 ,3, and 5?  Now, you’ll need to include a description for those amounts you reported.  You’ll include the description in box 14, or you may also choose to use a separate statement.  The description should be short and to the point.

If you are interested in reading the 34 pages of instructions, you may see the entire instructions document here.

Take a Moment to Review the 2020 W-2

So, while our attention may be stretched thin between remembering MLK and thinking of our country’s future under the leadership of our new president, there is still work to do in the office.  Specifically, remember to take time to look over the 2020 W-2.  This is not a new document, but it does have some updates.  For example, there are specific places you will report wages received due to COVID-related issues.  Also, if you deferred Social Security tax for any employees, you will have to catch it up by the aforementioned deadline.  Finally, make sure you get those W-2 forms out by February 1st, 2021, since January 31st lands on a Sunday.


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