It’s every payroll manager’s worst nightmare after year end – having to issue W-2cs. What went wrong? Let us go back in time and see what we are doing (maybe what we should have done) throughout the year. Being proactive, planning ahead and organizing all aspects of your year-end process and obligations result in a less stressful time of the year. Mistakes happen to all of us, but when it does, it is important to correct immediately to avoid any potential fines.
As a general rule, payroll preparation for year end typically should begin in October/November. However, it is important that preparation actually begins in January and is conducted all throughout the year. As it gets closer to October/November it’s time to prepare your payroll department as the end of the year approaches and get started with the new year’s payroll processing and all its changes. Year end is not just the preparation of the W-2s. It’s so much more. In this two part series we will talk about some of the key factors that lead up to year end so that you can avoid W-2c’s but if you have to do them we will also provide some great advice on what to do! Let’s get started with some things you should be diligent about.
Balancing is necessary. Not just reviewing reports but balancing your reports to analyze whether or not the payroll processed is as you expected. Create a spreadsheet with formulas. To not only balance your week, month, quarter & year-end, you want to determine taxable wage for FIT, FICA, SIT, Taxes for OASDI, and HI. Balance your FUTA, SUTA and all your Taxes for filing. When you subtract out your live checks and direct deposit your balancing column should be Zero. You will have to modify your spreadsheet each pay as you find discrepancies. Is it your formula or is it your system which is causing your spreadsheet to be out of balance? Remember once you change the formula then update your spreadsheet from the beginning to see if anything falls out in earlier payroll runs. Balancing each payroll, then to the month, to the quarter and then to the year after each payroll run may seem like a lot of work but the end result, year-end, it will be a blessing and a lot less hassle, as well as how easy quarter end will be too. By balancing on a regular basis, you will immediately know whether there is an issue, which you can fix right away before you finalize the payroll or at the latest on the next payroll. You will know the issue is in the last payroll you processed because you have balance all the way through year-end on the last payroll. Be careful that your correction does not cross over month, quarter and especially year-end. Taxes are due dependent upon constructive receipt (payday) so if your error is in one quarter and the correction is in the next quarter, you may have an issue with reporting. Watch your dates so if the adjustment results in a reversal in a different quarter you want to make sure to correct it in the appropriate quarter otherwise there will be an issue in reporting since you cannot report a QTD negative Wage/Tax to the jurisdiction. The monthly reconciliation becomes the basis for your 941 and Annual Reconciliation.
Bank reconciliations should be reconciled at least monthly. The bank reconciliation can point out items such as:
- handwritten checks
- verify the employee’s earnings record has been updated
- un-cashed checks
- determine if the check represents abandoned wages; the escheat process may apply
- if the check was issued in error, verify the employee’s earnings record was updated
Verify the payroll general ledger accounts are in balance with your payroll records. Pay particular attention to tax liability accounts as they can indicate under and overpayments of taxes.
Review the employee receivable accounts. Items to look for include:
- loans made to employees at an interest rate that is below the federal interest rate. These loans are considered below-interest compensation related loans. The amount representing the difference between the federal interest rate and the rate charged the employee is taxable and must be reported as income on any day that the amount of the loan is more than $10,000.
- loans given to an employee that are forgiven or not expected to be repaid. These loans become fully taxable to the employee in the year the loan is forgiven.
- un-reimbursed travel advances. Amounts that are not repaid and are unsubstantiated may need to be added to the employee’s income.
A review of accounts payable will often disclose show taxable and non-taxable items that should be reported on an employee’s W-2 as well as other employment tax returns. Items to look for include:
- manual checks not entered in the payroll system
- advances that have not been substantiated or returned
- certain tuition reimbursements
- adoption assistance
- certain moving expense reimbursements (both taxable and non-taxable)
- awards, gifts or prizes
A review can also identify an employee who is on the company payroll and is also receiving a check through accounts payable as an independent contractor. While it is possible for a worker to be both an employee and an independent contractor, the issuance of a W-2 and 1099 to the same person by the same organization can invite an audit by various government agencies. Remember if an employee provides a service to the employee that is not their normal job (cleaning offices, maintenance, lawn service), these payments may be W-2 income and if the employee is eligible for overtime, you may need to recalculate the employee’s check for the week he/she was paid.
Year-End Checklist – Year-end can start as early as August, depending on your payroll. The earlier you start the better year-end will be. You actually have already started with the first payroll in January. In August, review last year’s year-end and see what worked and what your pain-points were. You can then see if you can prevent having those same issues this year. For example, if you received information late, make a contact and try to get information early this year. What caused your W-2Cs and try to prevent the same issue this year.
Set-up your year-end kick-off meeting and remember to invite everyone involved with any aspect of year-end.
- Human Resources
- Accounts Payables
Remember the Mailroom, as there will be an influx in postage and you do not want to run out on January 31.
Create your Year-End Calendar. Your calendar will show all of the on-cycle payrolls for the last quarter of the current year through 1st quarter of the new year. All special off-cycle payrolls you expect to have. Dates to communicate to your stakeholders, due dates of reporting needed (company vehicles, relocation, non-cash fringe benefits). Besides your reporting due dates to the many jurisdictions.
Pre-balancing your W-2s in November is a good time to see if there are any out-of-balances, or if something did not fall out on your balancing spreadsheet. Balancing is especially important practice with implementations… ending amounts from the Legacy System should match the beginning amounts in the New System. Make sure all your quarter –to-dates match before you process the first payroll in the new system. Other items to review before year-end to avoid errors and potential penalties.
- Review your amounts reported in Box 12, Code DD. This is where the aggregated value of the employer-sponsored health coverage is reported.
- Review Box 13 to make sure your retirement plan box is checked in error or not checked. Review your types of retirement plans to see when you should check Box 13 on the W-2.
- Check your Group Term Life in Box 12, Code C. Employer-paid premiums for up to $50,000 of group term life insurance coverage are excludable from an employee’s income and exempt from employment taxes. Coverage in excess of $50,000 is taxable. The IRS provides Uniform Premium Table I to be used in the calculation of group term life insurance.
o Codes M & N in Box 12 is used only for uncollected FICA tax for taxable group-term life which can be transferred to a former employee. However, BE CAREFUL, Social Security and Medicare taxes that were not collected from a former employee while he or she was an employee remains the responsibility of the employer.
o Dependent group term life insurance is not reported in Box 12 with any code, but dependent group term life insurance must also be taken into consideration for a spouse, or dependent, if the coverage exceeds $2,000. If the coverage exceeds $2000, the entire coverage amount is considered taxable income and is subject to all employment taxes. Income is calculated in the same manner as employee group term life coverage. If the age of the spouse or dependent is not available, the age of the employee is used in the calculation.
- Excess contributions to qualified retirement plans e.g. 401(k) and 403(b). If you have reported contributions in excess of limitations you do not report those on the form w-2 but on form 1099R. Contact your plan administrator when this happens.
- Look at your pre-tax contributions to make sure no one has exceeded the limits for Flexible Spending Accounts ($2650 for 2017) and Health Savings Accounts ($6750.00 for 2017). If you can catch these before you issue your W-2s you eliminate quite a few headaches to correct after the fact.
- Review and calculate your employer provided vehicles, an employee’s use of a company car is treated as taxable compensation, subject to income tax, FICA, and FUTA taxes, unless it falls under one of the following exceptions:
o Working condition fringe benefit
o De-minimis benefit
o Qualified non-personal use vehicle
- Review your automobile allowances. When an employee is given an automobile allowance in lieu of a company vehicle the allowance is considered 100% taxable income. The reason for this is the employee does not have to provide any substantiation as to how and when the funds were spent, and they are not required to return any excess funds. You may want to check accounts payable for possible payments.
o For funds to be considered non-taxable, the IRS requires there be a direct business connection for the use of a vehicle and the expenditure be substantiated following IRS guidelines.
- It may sound odd, but check for missing or incorrect name or SSN. The Employee Verification Service (EVS) matches employee names and Social Security numbers with SSA’s records. The Employee Verification Service (EVS) matches employee names and Social Security numbers with SSA’s records. It is important to verify the name, address, and SSN you have on file for each employee. Incorrect name and Social Security numbers may cause employer penalties of up to $50.00 per Form W-2, not to mention the time it takes to produce a corrected statement or tax return if the problem is identified after the employee receives their W-2 form in January.
o Have your employees verify their name, address. This can be done by a simple message on the employee’s check in early December. Just remember name changes can only happen if the employee changed their name with the SSA. Payroll can request a copy of new SS Card as proof of name change.
- On your first preliminary W-2 register check your FEIN and the tax year.
Review your Policies so you understand how they are processed, and making sure they recorded in your payroll properly. Check your benefits and those non-cash fringe benefits e.g. Co Vehicles, Group Term Life, Relocation. With those non- cash fringe benefits, are you going to gross them up or is the employee going to pay the taxes. If you wait to put the non-cash fringe benefits into payroll at year-end you run into the issue the employee as terminated and does not have a payroll to take away the additional taxes from their net pay. The employer will then have to gross-up the benefit and pay the taxes on behalf of the employee.
It’s important to manage overpayments and immediately, after the current payroll run and before the next payroll run resolve it. Overpayments can create many headaches which can linger through the year if not resolved. Keep track of your voids and manual checks. Creating a spreadsheet to document your voids, reissues and manual checks will help with resolving issues, balancing, bank reconciliations including positive pay reporting.
Another thing to add to your calendar is your 3rd Party Sick Pay reporting. The final report is not required to be provided to the employer until January 15th of the following year. Do you get your 3rd Party Sick pay reported to you annually, quarterly or preferably monthly? If you receive it at least quarterly, it would be easier to make an estimation for the December entry. And if you make an error that maybe only one W-2c, rather then all of them.
Once your totals on your spreadsheet all look good, from balancing your payrolls on a regular basis, even if you had an implementation mid-year, you are ready for W-2s. Life as we know it is looking good. So, WHAT HAPPENED? Stay tuned…