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

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 [phone].

* Up to five names and numbers can be verified by phone; up to 50 names and numbers can be verified through the local SSA office.

* Up to 250,000 names and numbers can be verified through the SSA Employer Verification Service.

* At year-end, ask employees to re-check their names and numbers on file.

* In the event of a name change, ask the employee if the change has been made with the SSA. If not, tell them to do so.

* Avoid using first initials instead of names; avoid nicknames or titles, such as Dr., Ph.D. and Esq.

* Compound names no longer require a hyphen--instead, insert a blank space.

* Use the verification service to check accuracy where there are multiple last names.

* Follow the most current SSA instructions on filling W-2 name fields and model your payroll record accordingly.

* Remember: Social Security numbers do not begin with the number 8 or 9 and cannot be all the same number or sequential numbers. A number beginning with the number 9 may be an Individual Taxpayer Identification Number issued to a nonresident without a work permit.

* Ask new hires without Social Security numbers to get one as soon as possible. Ask for proof that they have applied. If you need to file before the Social Security number is obtained, entering all zeros in MMREF electronic or magnetic W-2 filings will be accepted. Use "applied for" on paper W-2s.

When the employee's Social Security number becomes available, file a W-2 correction to ensure that wages are posted to the earnings history. To avoid other legal problems, employees who perform services must be paid, even if there is no Social Security number. Establish a mechanism for payment and also set up an edit program to trigger a follow-up.

RELATED ARTICLE: Quick 941 & W-2 Tips

NEGATIVE LIABILITIES ARE not allowed on Schedule B or on Line 17 of Form 941--they might be read as positive numbers, increasing liabilities and generating unwanted assessments.

Liability totals from either Schedule B or Line 17 must match the cumulative Line 13 of Form 941. The SSA and IRS will match your W-2 totals with your 941 account balance (from four quarters). Out-of-balances will generate assessments.

So look over your 941 before you file it and balance your W-2s with your 941 before you file them.

Jerri L.S. Langer is owner of Elk Grove-based JLS Langer Consulting and the government relations chairperson for the National Association of Tax Reporting and Payroll Management. You can reach her at [e-mail].