Sources of Tax Information (W-2s, 1099s, K-1s)

Accurate tax preparation begins with proper documentation. As an enrolled agent, you must understand the various information returns that report income and withholding to both taxpayers and the IRS. This section covers the key documents tested on the EA exam.

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Form W-2: Wage and Tax Statement

The Form W-2 is the most common tax document, reporting wages paid and taxes withheld for employees.

Employer Deadline

Employers must furnish Form W-2 to employees by January 31 following the tax year. This deadline also applies to filing W-2s with the Social Security Administration (SSA). For tax year 2024, the deadline is January 31, 2025.

Key W-2 Boxes

Understanding what each box contains is critical for the EA exam:

Why Box 1, Box 3, and Box 5 May Differ

A frequently tested concept: these three boxes often show different amounts:

• Box 1 (Federal wages) is reduced by pre-tax deductions like 401(k) contributions, health insurance premiums, and HSA contributions
• Box 3 (Social Security wages) includes 401(k) contributions but excludes cafeteria plan benefits
• Box 5 (Medicare wages) is similar to Box 3 but has no wage cap

Example: An employee earns $75,000, contributes $5,000 to a 401(k), and pays $3,000 in pre-tax health insurance:

• Box 1: $67,000 ($75,000 - $5,000 - $3,000)
• Box 3: $72,000 ($75,000 - $3,000, 401(k) is not excluded)
• Box 5: $72,000 (same as Box 3 for wages under the Social Security cap)

Box 12 Codes

Box 12 contains lettered codes reporting various benefits and contributions. Common codes include:

Missing or Incorrect W-2

If an employee does not receive a W-2 or receives an incorrect one:

1. Contact the employer first - Request a corrected W-2 or W-2c
2. Call the IRS - If unresolved by late February, call 800-829-1040
3. File Form 4852 - Use this substitute W-2 if the form is not received in time to file

Form 4852, Substitute for Form W-2, allows taxpayers to estimate their wages and withholding based on pay stubs. The IRS may delay refunds to verify the information. Keep Form 4852 until you begin receiving Social Security benefits to protect your earnings record.

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Form 1099 Series: Information Returns

The 1099 series reports various types of non-wage income. Each type has specific thresholds and deadlines.

1099 Comparison Table

Form 1099-NEC: Nonemployee Compensation

Form 1099-NEC reports payments of $600 or more to independent contractors, consultants, and other self-employed individuals. This form replaced Box 7 of 1099-MISC starting in 2020.

Key Points:

• Payments to attorneys are reported on 1099-NEC regardless of business structure
• Due to the IRS AND recipient by January 31 (no extension)
• Self-employed recipients report this income on Schedule C

Form 1099-K: Payment Card and Third-Party Network Transactions

Form 1099-K reports payments from payment cards (credit, debit) and third-party payment networks (PayPal, Venmo, etc.).

2024 Threshold: Third-party settlement organizations must report payments totaling $5,000 or more in a calendar year (no transaction minimum required).

Important: The 1099-K threshold was supposed to drop to $600 under the American Rescue Plan Act, but the IRS delayed implementation. The 2024 threshold of $5,000 is a transition step.

Form 1099-R: Retirement Distributions

Form 1099-R reports distributions from:

• Pensions and annuities
• 401(k), 403(b), and 457 plans
• IRAs (traditional, Roth, SEP, SIMPLE)
• Life insurance contracts
• Profit-sharing plans

Distribution Codes (Box 7) indicate the type of distribution:

Form 1099-G: Government Payments

Form 1099-G reports:

• Unemployment compensation (Box 1) - fully taxable
• State/local income tax refunds (Box 2) - taxable if you itemized the prior year
• RTAA payments (Box 5)
• Agricultural payments (Box 7)

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Schedule K-1: Pass-Through Income

Schedule K-1 reports each owner's share of income, deductions, and credits from pass-through entities.

Three Types of K-1

What K-1 Reports

K-1s report the taxpayer's share of:

• Ordinary business income/loss
• Rental income/loss
• Interest and dividend income
• Capital gains/losses
• Section 179 deductions
• Credits (foreign tax, low-income housing, etc.)
• Self-employment earnings (partnerships only)

K-1 Timing Issues

Pass-through entities often file extensions, meaning K-1s may arrive late. Common issues include:

• K-1s arriving after April 15 (taxpayer may need to extend their own return)
• Amended K-1s requiring amended individual returns
• Multiple K-1s from different entities with varying timing

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Other Important Information Documents

Form 1098 Series

Form 1095 Series (Health Coverage)

2024 Update: Employers are no longer required to automatically furnish Forms 1095-B and 1095-C to all individuals. Forms must only be provided upon request within 30 days.

SSA-1099: Social Security Benefits

Form SSA-1099 reports Social Security benefits received. Box 5 shows the net benefits used to determine taxable amount. Up to 85% of benefits may be taxable depending on combined income.

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Electronic Filing Requirements

Beginning in 2024, filers with 10 or more information returns must file electronically. This threshold is calculated by aggregating:

• All 1099 forms
• W-2 forms
• Other information returns (1098, 5498, etc.)

Example: An employer with 5 employees (5 W-2s) and 6 independent contractors (6 1099-NECs) must e-file because they have 11 total returns.

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On the EA Exam

Key topics frequently tested:

1. W-2 deadline: January 31 to employees and SSA
2. Box differences: Why Box 1, Box 3, and Box 5 differ
3. 1099-NEC threshold: $600 for independent contractors
4. K-1 sources: Know which entity type issues each K-1
5. Form 4852: Substitute when W-2 is missing
6. 1099-K threshold: $5,000 for 2024