Check System
Send us your comment!

Your comment will be read by our web staff, but will not be published.

Please do not enter any personal information. Your comment is voluntary and will remain anonymous, therefore we do not collect any information which would enable us to respond to any inquiries.

However, provides a How to Contact the IRS page where you will find guidance on where to submit specific questions.

Share this presentation
Copy and paste the following URL to share this presentation
To email a link to this presentation, click the following:
This program writes a small 'cookie' locally on your computer when you set a bookmark.
If you want to utilize this feature, check the following checkbox. Otherwise, bookmarks will be disabled.
This is an IRS
audio presentation.

To view this page, ensure that Adobe Flash Player
version 10 or greater is installed.

Get Adobe Flash player

Good day and welcome to today's webcast entitled IRS Webinar: Reconsolidation of Payroll. I'd like to now turn the floor over to your host, IRS Representative Nelia. Ma'am, the floor is yours.

Nelia - Internal Revenue Service Thank you. Welcome to the IRS Federal, State and Local Government presentation on how to reconcile forms 941, W-3 and W-2 to gross payroll. I am Nelia and with me today is Nicole. We are happy to be a part of this presentation. This presentation is informational only. Specific payroll reconciliation issues may depend on specific facts and circumstances. This information provides general guidance on how to reconcile Forms 941 W-3 and W-2 to gross payroll. So why do you think it is important to reconcile Forms 941 W-3 and W-2 to gross payroll? There are benefits to performing a reconciliation. Employers who reconcile payroll can avoid discrepancies and costly errors by ensuring employees' wages and taxes, which are reported to both, the Internal Revenue Service and the Social Security Administration match.

During our audits, we see issues arise because the payroll reconciliation is not properly completed. Completion of payroll reconciliation usually results in more accurate payroll wages and taxes reported on quarterly Forms 941 or annual Form 944, fewer Forms W-2c are needed and fewer notices are received from the IRS and the Social Security Administration. Nicole - Internal Revenue Service Nelia, what kind of data do we need from our payroll accounting system to complete the reconciliation? Nelia - Internal Revenue Service Great question, Nicole. The data should include total gross payroll for the year, annual totals for each employee's pre-tax and after-tax payroll deductions. And if any employees were paid over the Social Security wage base, you will need to compute the total amount of their individual wages that exceed the wage base limit. The wage base limit is announced by Social Security annually. So, you will also need the quarterly Forms 941 or an annual Form 944 and, finally, your Forms W-2 and Form W-3. If you're filing electronically, the Form W-3 will be reflected in the totals of Forms W-2. Nicole, can you walk us through the steps of payroll reconciliation. Nicole - Internal Revenue Service Yes, I can Nelia. Step one is to determine your gross payroll amount. Gross payroll includes all payments and benefits given to your employees including salaries, hourly pay and overtime, sick and vacation leave, allowances like vehicles and uniforms, taxable group term life insurance and the other payments like bonuses or taxable benefits unique to your employees. You need to verify all payments and non-cash benefits provided to or for employees have been considered in the determination of their compensation. Step two is to verify all the amounts for pre-tax and after-tax deductions are included and correctly coded in your payroll system to be subtracted from the gross payroll as applicable to arrive at total Medicare, Social Security and federal income tax wage amounts. Nelia - Internal Revenue Service Nicole, let's provide some examples of pre-tax and after-tax deductions next. Nicole - Internal Revenue Service Sure, Nelia. Some examples of pre-tax deductions include health and dental insurance, medical flexible spending arrangements, dependent care and certain retirement plan contributions. And some examples of after-tax deductions include employee's share of insurance policies outside cafeteria plans, union dues, garnishments and other items unique to your employees. Step three is to ensure all amounts on the Form W-3 reflect the total amounts from the W-2s. Add the amount in box 5 for all Forms W-2 for Medicare wages and tips and compare it to total Form W-3 amount. Also do this for box 3 Social Security wages and box 1 wages, tips and other compensation. If wages include tips, compare Social Security tips in box 7. The next step is to review the taxes withheld in boxes 2, 4, and 6. Nelia - Internal Revenue Service Nicole, so what happens if we followed all first three steps, but the reconciliation still does not match? Nicole - Internal Revenue Service Good question, Nelia. If you followed these three steps and the total of Forms W-2 don't match Form W-3 then compare forms W-2 wage amounts to the individual employee's gross payroll, minus their tax deductions and Social Security wages base limit adjustment amount as applicable. Next, multiply the Social Security and Medicare wage amounts by the applicable employee tax rates. The results should match those amounts shown as Medicare and Social Security taxes on the Form W-2.

Step four is to determine if the Medicare, Social Security and federal income tax wages as well as applicable taxes withheld reported on the quarterly Forms 941 or annual Form 944 match those on the Form W-3 for that year. Please note, generally, Form 941 or Form 944 Medicare taxes withheld, and Social Security taxes withheld can be divided by two. The result compared to the employer's share of these taxes should match the Form W-3 amounts. Additional Medicare tax applies only to the employee portion of the Medicare wages. There is no employer share of Additional Medicare tax. Therefore, dividing Medicare taxes by two may not always be exact since the employer must withhold Additional Medicare tax of 0.9% on wages in excess of $200,000 in the calendar year. Another exception could be the adjustment for the latter part of 2020 per the Cares Act Legislation. If there is a discrepancy between the Form 941 or Form 944 and the Form W-2 totals, you may receive a notice from the Social Security Administration or IRS asking for an explanation. If you receive a notice, there may be valid reasons for Forms 941 or Form 944 and the W-2 amounts to not match. Nelia - Internal Revenue Service So let's take a look at an example.

We have a gross payroll of $1 million, and the following items, health insurance of $120,000, dental insurance of $80,000, Social Security wage base limitation adjustment of $50,000, and retirement plan contributions of $150,000. Please note that Social Security wage base limitation adjustment is the wages that exceed the Social Security base amount. Let's begin by reconciling the Medicare wages and tips, usually the largest compensation figure reported. First, review the pre-tax categories for all employees to determine which are exempt from Medicare and subtract them from the gross payroll amount. In our example, they have health insurance of $120,000 and dental insurance of $80,000, totaling $200,000 to be subtracted from the $1 million gross payroll amount. This results in $800,000 of taxable Medicare wages that should be reported in box 5 of Form W-3 and total of Medicare wages on the Form 941 or Form 944. In our example, the employee's Medicare wages are $800,000 and it is assumed the employees are subject to Medicare but not Additional Medicare. You will report Medicare wages in box 5 or Form W-3. Box 6 of Form W-3 reports employees Medicare taxes withheld. You will report $11,600 in box 6, since $800,000 times Medicare tax rate of 1.45% equals $11,600. You will report Medicare wages in amount of $800,000 on Form 941 line 5c. The Medicare tax of $23,200 will be total reported on line 5c column 2 of the Form 941. On the Forms 941 or 944, the Medicare tax is employee and the employer's portion. Next, we will reconcile the Social Security wages. The following pre-tax deductions are tax exempt from Social Security wages and subtracted from the $1 million gross payroll amount: health insurance of $120,000, dental insurance of $80,000, and Social Security wage base limitation adjustment amount of $50,000 totaling $250,000 to be subtracted from $1 million gross payroll amount. Remember, some employees will earn more than base Social Security amount and not have Social Security tax withheld after that point. So, this results in $750,000 taxable Social Security wages that are reported in box 3 of the Form W-3 and the total of the Forms W-2 box 3. The Social Security wages are reported on Form 941 line 5a. The $750,000 of Social Security wages are reported in box 3 on the Form W-3. Box 4 of the Form W-3 reports employees Social Security taxes withheld. You will report $46,500 in box 4 since $750,000 times Social Security tax rate of 6.2% equals $46,500. The Social Security wages should be reported on Form 941 line 5a. Lines 5a column 2 is the employer and employees share of Social Security tax.

The total amount is $93,000. If tips are involved, you can refer to instructions for Form W-3, Form 941 or Form 944. The same reconciliation process should be completed for this item. Lastly, the reconciliation of wages, tips and compensation will be completed in the same manner as shown for the Medicare and Social Security wages. The following pre-tax deductions are exempt from federal income tax wages and subtracted from the $1 million gross payroll amount: health insurance of $120,000, dental insurance of $80,000 and the retirement plan contributions of $150,000. Thus, $350,000 is subtracted from the $1 million gross payroll amount. This results in $650,000 of taxable federal income wages that should be reported in box 1 of the Form W-3, which is total of box 1 of the Forms W-2 and the total of line 2 of the Forms 941. Report your total wages, which are subject to federal income tax on Form W-3 box 1. Remember, the gross wages are $1 million, but the reportable wages are $650,000. You will report your wages, tips and other compensation on Form 941 line 2. Sometimes we see employers report total gross compensation on Form 941 line 2 instead of taxable compensation. Line 2 of Form 941 should match the total compensation reported on Form W-3 box 1 wages. When the gross wages are reported on Form 941 line 2, it will not match the wages reported on Form W-3 box 1. Refer to Form 941 line 2 instructions which state to enter on line 2 the amount that would be included in box 1 of your employees' Forms W-2. See the general instructions for Forms W-2 and W-3 for detail on what to report in box 1 wages. Again, the amounts reported on line 2 of the Form 941 and box 1 of W-3 must match.

And this is how the final reconciliation of Medicare, Social Security and federal income tax wages by category would look like when you are done. Nicole - Internal Revenue Service Please note that box 1 or Form W-3 wages should tie to line 2 of Form 941 with the dollar amount $650,000. Box 3 of Form W-3 Social Security wages ties to line 6a column 1 of the Form 941 with the dollar amount of $750,000. Finally, box 5 of Form W-3 Medicare wages ties to line 5c column 1 with the dollar amount of $800,000. The reconciliation of Medicare, Social Security and federal income tax wages by category shows the wages reported are not the same as the gross wages of $1 million. Let's look at an example with no Social Security wages and taxes. We have an appraisal district with a gross payroll of $1.5 million and the following items, no health insurance and dental insurance, wages paid to pre-April 1, 1986 hired employees with no 218 Agreement in the amount of $200,000. Section 457 deferral plan of $50,000 and an accountable plans for $9,000. In this example, we do not have any Social Security wages and taxes because the appraisal district does not have any employees covered by Social Security. The district employees are covered by a qualified public retirement plan as required by law. Next, we will discuss a few exclusions from Medicare and Social Security taxable wages. Dependent Care, a Section 129 is a Flexible Spending Account, (FSA) that enables an employees to make special pre-tax or tax free elections from their paycheck to pay for child and adult care expenses. A 403(b) plan, also known as a tax-sheltered annuity plan, is the retirement plan for certain employees of public schools, employees of certain Code Section 501(c)(3) tax exempt organizations and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. Accountable plans that follow the Internal Revenue Service regulations for reimbursing employees for business expenses in which reimbursement is not counted as income. This means reimbursements are not subject to withholding taxes or W-2 reporting. To be excludable from wages, expense reimbursements must be made under an accountable plan. A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pre-tax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefits such as cash and one qualified benefit. A qualified benefit is a benefit that does not defer compensation and is excludable from an employee's gross income under a specific provision of the Code without being subject to the principles of constructive receipt. Qualified benefits including the following, accident and health benefits, but not Archer medical savings accounts or long-term care insurance, adoption assistance, dependent care assistance, group term life insurance coverage, health savings accounts including distributions to pay long term care services. The written plan must be specifically describe all benefits and establish rules for eligibility and elections. A medical savings plan, flex spending, as covered under Internal Revenue Code Section 106. Employer provided accident and health coverage including insurance is excluded from the income of an employee, spouse or dependent. Please see Publication 969, health savings accounts and others tax favored health plans for more information on these plans.

Regarding Medicare only employees, who have been in continuous employment with the employer since March 31, 1986, who are not covered under a Section 218 Agreement nor subject to the mandatory Medicare provision, remain exempt from Medicare taxes, provided they are members of a public retirement system. Scholarships and grants used to pay tuition and fees can be excluded from gross income. Therefore, scholarships and grants not used for tuition and fees are included in gross income. For more information refer to Publication 970, Tax Benefits for Education. The fair market value of meals or lodging furnished by an employer may be non-taxable to the employee. Internal Revenue Code Section 119 provides an exclusion for the value of meals and lodging provided by the employer under certain circumstances. Cash provided for meals is not excludable under this Internal Revenue Code section. However, under certain circumstances, cash for meals can be excluded as a de minimis fringe benefit. Education expenses up to $5,250 may be excluded from the tax under Internal Revenue Code Section 127. Amounts for additional education expenses exceeding $5,250 may be excluded from the tax under Internal Revenue Code Section 132(d). The following are some of Section 132 fringe benefits; no additional costs service, working condition fringe, qualified transportation fringe, on-premises athletic facilities. There are three types of non-cash awards that may be excluded from income. Each category has specific requirements that must be met to be excludable. These categories are, certain employee achievement awards, certain prizes or awards transferred to charities, de minimis awards and prices, See Publication 5137, Publication 535, Publication 15-B, and for more information. And finally, while most of the exclusions we discussed are also excluded from the federal income tax with the exception of pre April 1, 1986 hired employees, if no section 218 Agreement, there are additional examples of exclusions from the federal income taxable wages, and these are, group term life insurance less than $50,000, contributions to certain deferred compensation plans. Statutory employees, certain independent contractors may be treated as employees by statute for certain employment tax purposes. Employers are not required to withhold federal, state or local income taxes from statutory employee wages. Next, we will discuss a few additions to Medicare, Social Security and federal income taxable wages. Any fringe benefits you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Although there are special rules and elections for certain benefits, in general, employers report taxable fringe benefits as wages on Form W-2 for the year in which the employee received them. Nelia - Internal Revenue Service Now that we have completed the payroll reconciliation, here are a few final tips for more accurate payroll information to be reported to the government and sent to your employees. Make sure any late adjustments to payroll that are included in the fourth quarter Form 941 or annual Form 944 are reported on the Forms W-2 and W-3. Complete the payroll reconciliation once the year end's payroll is finalized and prior to sending the fourth quarter Form 941 or the annual form 944 to the IRS. Send the Forms W-2 to employees to prevent them from having to file amendments on their personal income tax returns.

Annually review Section 12 of Publication 15 Employer's Tax Guide, Section 2 Fringe Benefit Exclusion Rules of Publication 15-B Employer's Tax Guide to Fringe Benefits, and Publication 963, The Federal State Reference Guide that provides state and local government employers a comprehensive reference source on Social Security and Medicare coverage. And finally, if you receive a letter from the IRS about a discrepancy in your reported wages, call the telephone number listed on the letter for assistance. This concludes our presentation. We hope that you have found this information on completing the payroll reconciliation helpful. For more information on these forms and filing requirements, please visit us online at Thank you for your attention. Operator Ladies and gentlemen, this does conclude today's webcast. You may now disconnect your lines and enjoy the rest of your day.