In yesterday’s Advisor, we went over basic tax information regarding payroll deductions and Form W-4. Today, we cover the W-2 form as well as basic tax filing information.
 |
Remember to check the current tax rate and maximum wage base for Social Security tax as well as the current Medicare tax rate before the training session.
Form W-2
Another important tax form is the W-2 form. Most employees will already be familiar with the W-2, since it is used for filing income taxes each year. Many employees, however, may not be familiar with how the figures on the form are calculated. The amount of federal and state income tax shown on the W-2 is based on an employee’s W-4. The information on the W-4, as we’ve seen, is just an estimate of what employees believe they owe the government in tax for the calendar year. The actual tax owed might be more or less and is determined when the tax return is filed.
Social Security tax is a set percentage of an employee’s pay up to a maximum wage base. What this means is that employees who earn over the maximum wage base don’t get taxed on the extra amount. The Social Security tax rate and maximum wage base change over the years. Medicare tax is also a set percentage of employees’ pay. There is no wage limit on Medicare taxes.
Choosing the Right Tax Form
When it comes time to do their federal taxes, employees must make sure they use the right tax forms. Employees with no dependents and an income of less than $100,000 a year who are single or married and filing jointly, who earn less than $1,500 in interest or dividends (these figures change, so check the latest numbers before your training session), and who do not itemize deductions can use Form 1040EZ.
Employees with an income of less than $100,000 a year who do not itemize deductions but do not qualify for using the 1040EZ form may be able to use Form 1040A. Many of your employees will probably need to use Form 1040. Employees with an income greater than $100,000 who itemize deductions and have interest and dividend income must use Form 1040.
Have you noticed that some of your employees have the potential to be effective leaders? Get them the training they need with BLR’s TrainingToday Leadership for Employees Library. Get the details here.
Choosing the Right Tax Schedules
First, discuss any relevant state and local tax schedules. Employees must also ensure that they use the right federal tax schedules when filing their returns.
- Schedule A must be used by employees who itemize deductions.
- Schedule B must be used by employees who earn more than $1,500 in interest from savings accounts, certificates of deposit, money markets, and other bank accounts. Employees who earn more than $1,500 in dividends from stock, bonds, and mutual funds must also complete Schedule B.
- Some employees may have a business of their own on the side. Nonemployee income of this kind must be reported on Schedule C.
- Any capital gains or losses, such as from the sale of stock, must be reported on Schedule D.
Gathering Needed Information and Documentation
Once employees have the right forms, they need to gather all the information and documentation they will need to complete their returns accurately. Ideally, employees will have established a system for organizing and filing this information as it comes in during the year so that they will have it all at their fingertips come filing time.
- First of all, they will need their W-2 forms, copies of which they will need to attach to their federal and state tax returns.
- Banks, mutual funds, and other financial institutions issue a Form 1099 each year to employees who have interest income from savings or dividends from securities.
- Banks and mortgage companies provide their clients with a statement of mortgage interest for the year. Banks also provide statements for interest on home equity loans, some or all of which may be tax deductible. Employees with mortgages and home equity loans need this information if they itemize deductions.
- Employees who own their homes will also need to know how much real estate tax they paid during the year, since real estate taxes are deductible expenses. This information may be on the mortgage statement if the bank pays real estate taxes for the employee. If the employee pays his or her own taxes directly to the municipality, the employee will have a tax receipt from the town or city.
- State taxes are also deductible on the federal tax form. Employees should also have their state tax return for the previous year handy.
- Finally, employees will need all receipts for other deductions claimed on the tax return—for example, receipts for medical expenses, charitable contributions, excise taxes on their vehicles, and so forth.
Trying to get your employees trained to show leadership? It isn’t easy to fit it in—schedulewise or budgetwise—but now there’s BLR’s Leadership for Employees Library. Train all your people, at their convenience, 24/7, for one standard fee. Get More Information.
Preparing a Tax Return
Instruct employees to follow these basic guidelines for preparing a tax return:
- Read and follow all instructions carefully. If there’s something you don’t understand, call the IRS or the state tax office. Don’t guess.
- Write legibly if you fill out your tax form by hand. If you file electronically, type carefully and accurately.
- Round off figures to the nearest dollar.
- Sign and date your return and enter your Social Security number.
Even though it is not your job to advise your employees about taxes, you should be aware of the basic tax guidelines employees need to follow to comply with tax laws. You need to be able to answer employment-related tax information concerning withholding and other important tax issues. You can also provide employees with additional useful information about filing taxes and avoiding common tax-filing mistakes.