W-2 Reconciliation: A Step-by-Step Guide for Year-End Reporting

W-2 reconciliation refers to the process of comparing an employee’s W-2 forms with the business’ tax records to ensure that the taxes and financial information stated on both documents align. This is a crucial part of year-end payroll reporting for businesses in the U.S., as it confirms their compliance with IRS regulations.

Any discrepancies found during the W-2 reconciliation could lead to penalties for underreporting or overreporting employee income, so it’s important to be thorough. In this article, we’ll discuss the step-by-step process for W-2 reconciliation and share the best practices to keep in mind when reconciling your records.

Let’s start!

Key Takeaways

• W-2 reconciliation ensures that the correct taxes are withheld from employees and is crucial for maintaining payroll accuracy.
• To conduct W-2 reconciliation, you first need to verify employee details and match payroll data with tax filings. Then, you can calculate the withheld taxes, review any additional deductions, and prepare and distribute the Form W-2.
• W-2 reconciliation is important for ensuring compliance with IRS regulations and avoiding tax filing penalties.
• Some common errors you may find during W-2 reconciliation include the wrong employee details or wages and missing tax withholdings.
• When conducting W-2 reconciliation, the best practices to follow are to start early, use online tools for convenience, and keep detailed financial records.

What Is W-2 Reconciliation?

W-2 reconciliation is the method of comparing payroll records with an employee’s W-2 forms to ensure payroll tax compliance. By conducting W-2 reconciliation, you can confirm that the data you report to the IRS and the Social Security Administration (SSA) reflects accurate payroll information so you can avoid hefty fines and internal audits.

In the U.S., W-2 reconciliation is an important step in your year-end payroll processing, as it ensures that you are withholding the right amount of taxes from your employees. Any discrepancies in this amount, whether by mistake or on purpose, can lead to incorrect tax filings and accuracy-related penalties, which is why it’s important to be thorough when reconciling your W-2s.

5 Key Steps in W-2 Reconciliation

Now that you know why W-2 reconciliation is important, you may be wondering how to reconcile W-2 forms in the first place.

Here is a W-2 reconciliation checklist and guide you can follow to ensure that you are taking all the necessary steps in this process:

#1. Verify Employee Information

The first step in W-2 form reconciliation is to verify all employee data for accuracy.

This includes checking the following:

• Employee name
• Social Security Number
• Complete address
• Current wages

Having accurate and up-to-date information will help you avoid W-2 discrepancies with IRS and SSA records that can lead to delays in their processing. You can confirm these details with the employees and correct any errors promptly.

By verifying information, you not only ensure smooth tax filings but also help build trust in the company. This is especially helpful in small businesses, as it shows you care about your employees since mistakes in W-2 forms can directly affect their tax refunds.

#2. Reconcile Payroll Records With W-2 Information

Your payroll records, including the total wages received and taxes withheld from an employee, should match the data on your W-2 forms. Unfortunately, errors can often come from outdated employee information, mid-year wage adjustments, and incorrect payroll entries. The best way to prevent further issues is to correct the discrepancy before submitting the Form W-2 to the IRS.

#3. Compare W-2 Data with Tax Filings

After confirming that all employee information is accurate, you need to compare your W-2 records with your quarterly tax filings to ensure consistency.

This means that the amount stated on your W-2 tax filings should match those on your Form 941; if there are any discrepancies, investigate them right away and find a way to correct the error. By being proactive in resolving these issues, you can prevent internal audits from the IRS and avoid losing employee trust.

#4. Review State and Local Taxes

Tax deductions and W-2s go hand in hand, so the amount stated on your forms should also be the same as those reported to the state and local tax agencies. Double-check state unemployment wages, state withholding, and local taxes to ensure everything aligns.

Discrepancies can occur due to incorrect wage caps or exemptions, so correct them promptly to avoid potential penalties.

#5. Prepare W-2 Forms for Distribution

After the W-2 reconciliation is complete, the last step is to prepare the forms for distribution and filing. As a small business owner, you are responsible for filing W-2s with the SSA and providing a copy to your employees by January 31st. You don’t have to worry about printing and mailing all these forms, though, as you can do this step electronically.

Once you have the forms, ensure that each one is properly formatted and includes the correct salaries, tax withholdings, and benefits. Being thorough during this step will help you avoid any errors after submission that would cause further delays.

3 Common Errors Found During W-2 Reconciliation

During W-2 reconciliation, it’s not uncommon to encounter errors that could be caused by innocent clerical mistakes or an outdated payroll system.

Regardless of the cause, it’s important to file immediate W-2 corrections to avoid further penalties for errors like the following:

• Incorrect wages. Missing overtime, bonuses, or other adjustments made during the year could lead to incorrect employee wages on W-2 forms. To avoid this issue, consider conducting regular payroll audits and cross-checking the reported wages on an employee’s W-2 and your Form 940 or Form 941.

• Miscalculating tax withholdings. Miscalculations in the amount of withholding taxes can lead to underreporting or overreporting, which is subject to a steep 20% negligence penalty. Be sure to double-check all tax deductions every pay period and confirm current employee wages to steer clear of incorrect calculations.

• Wrong employee details. Having the wrong name, Social Security Number, or address on W-2 forms can cause delays, so it’s best to rectify these as quickly as possible. To ensure your W-2 forms don’t get rejected due to wrong employee details, we recommend regularly verifying employee information to confirm that all your records are up-to-date.

3 Best Practices for W-2 Reconciliation

If it’s your first time conducting W-2 reconciliation, here are some of the best practices to keep in mind to streamline the process:

#1. Start Early

Starting your W-2 reconciliation report early allows you to be more thorough in your checking payroll records and make the corrections without being pressured by a looming deadline. Early W-2 reconciliation also means you can address any employee inquiries related to the error and assure them that you are taking the necessary steps to rectify the mistake in time.

#2. Use Online Tools

Larger businesses may have difficulties with W-2 reporting and reconciliation as they deal with more employee information. So, consider using online tools like Paystub.org’s W-2 form generator to simplify this process. Our professional tool ensures your Form W-2 complies with IRS guidelines by presenting the crucial information you need in the proper format.

In addition to Form W-2, we also offer invoice and pay stub generators that can help with payroll management and hassle-free tax filing.

#3. Keep Detailed Payroll Records

Keeping detailed payroll records is one of the best ways to guarantee a smooth W-2 reconciliation, so make sure you document any changes in wages, tax deductions, or bonuses as soon as they are implemented.

Final Thoughts

W-2 reconciliation is an important process that helps your business maintain compliance with the IRS W-2 filing requirements and avoid penalties associated with inaccurate tax filings. If you’re a small business owner, regularly reconciling Form W-2 helps build trust with your employees, as you help them file the correct amount in their returns.

To help streamline this process, consider using Paystub.org to generate Form W-2 for your employees. Our online tool utilizes standardized templates that automatically calculate withholding taxes and outline the necessary information you need to reduce the risk of errors and other causes of delays.

W-2 Reconciliation FAQ

#1. What is the difference between W-2 reconciliation and W-2 correction?

The difference between W-2 reconciliation and W-2 correction is that the former refers to the process of checking for discrepancies, while the latter is the procedure for rectifying these errors.

#2. Why are state and local wages different on W-2?

State and local wages are different on W-2 because they follow different tax rules and have varying tax rates. For instance, some states may not deduct any income tax at all, which means your state wages may be bigger than local wages where local tax deductions apply.

#3. Can I file W-2 forms electronically?

Yes, you can file W-2 forms electronically, which can be especially convenient if you use Paystub.org to generate your W-2 forms. After filling out your forms, you can proceed with W-2 electronic filing at the SSA's Employer W-2 Filing Instructions and Information webpage.