Year-End Payroll Filing, ACA Reporting
October 21, 2016
The end of 2016 is quickly approaching, bringing with it a multitude of annual reporting and filing requirements. If employers do not carefully plan ahead, meeting year-end obligations can be confusing and overwhelming. And, careless mistakes can lead to costly penalties.
The already daunting tasks of closing out the year's payroll and complying with the Affordable Care Act (ACA) are compounded this year due to accelerated Form W-2 and Form 1099-MISC filing deadlines and significant changes to ACA information-reporting requirements. The following are the key changes employers must be aware of.
1. Accelerated Form W-2 Filing Due Dates
Every year end, employers must complete and file Forms W-2, Wage and Tax Statement, with the Social Security Administration (SSA) and provide copies of them to current employees, former employees who worked for the employer during the year and the tax agencies of the states in which they have employees on the payroll (unless not required by a particular state because, for example, a reciprocity agreement applies). Employers report on Form W-2 the amount of all compensation paid to their employees, as well as all federal, state, and local income and employment taxes withheld from their employees' compensation throughout the calendar year.
As in past years, the due date by which employers must give each employee a copy of his or her current year Form W-2 is January 31 of the following year. That means employers must give employees their 2016 copies by January 31, 2017. Employees need these copies when filing their personal income tax returns.
However, employers are now under the gun to prepare the W-2s much earlier to comply with accelerated due dates for filing the forms with the SSA. Under the Protecting Americans From Tax Hikes (PATH) Act, starting with 2016 Forms W-2 filed in 2017, the filing due dates are changed to:
- January 31 (from March 31) for Forms W-2 filed electronically with the SSA; and
- January 31 (from the last business day of February) for paper Forms W-2 filed with the SSA.
To align with these federal requirements, many states have accelerated their deadline for filing copies of Form W-2 to January 31 as well. In addition, an increasing number of states have lowered the threshold number of employees that triggers the requirement to file electronically. Employers in many states will also have to file their annual reconciliation returns earlier too.
As a result of these changes, employers must start their withholding and tax payment reconciliations and Form W-2 data-checking processes much earlier to ensure the information entered on the forms is correct before distributing them to employees and filing them with the SSA. This may be a challenge for many employers due to the fact that all final wage data may not yet be available to include on the W-2s in time. For example, employers will have to move faster this year to ensure that:
- Valuation of noncash compensation (e.g., determining the taxable value to an employee of stock transactions or the employee's personal use of a company car) is completed in time; and
- Certain data (e.g., amounts of third-party sick pay, relocation pay, retirement contributions or distributions) is obtained earlier from third-party administrators.
Employers should nevertheless be prepared in case they have to perform these tasks at the last minute before filing. They should also be prepared to make and file more corrections than usual after the fact, using Form W-2c, Corrected Wage and Tax Statement.
However, the obligation to issue and file Form W-2c to correct Form W-2 errors may be somewhat mitigated by a new penalty exception for de minimis corrections. Under the PATH Act, employers will not be penalized for filing incorrect W-2s if the error is $100 or less, or $25 or less if the mistake involves tax withholding. Employers will still have to provide Forms W-2c to employees who request them, in which case penalties for filing incorrect W-2s still apply.
Employers should note that the PATH Act also authorizes the IRS to issue regulations requiring employers to provide employee identification numbers on Forms W-2 instead of Social Security Numbers (SSNs). Although the IRS has not yet issued these regulations, if it does so before the end of this year, they would permit employers to truncate employees' SSNs on the W-2 copies they provide to their employees.
2. Responding to IRS Income-Verification Requests
All of these Form W-2-related changes were made to foster the IRS's and state tax agencies' stepped-up efforts to minimize the number of personal income tax refunds they issue based on fraudulent personal income tax returns. With earlier-filed W-2 forms, and a new coding system that matches up W-2s with individual income tax returns filed, fraudulent returns can be flagged before associated refunds are issued.
Employers should therefore be prepared to respond to a potential increase in IRS and/or state tax agency income-verification requests, which are issued to employers before individual income tax refunds are issued. Employers will be required to respond by providing the requested information on discs in the SSA's RW record format.
3. Accelerated Form 1099-MISC Filing Deadline
The earlier Form W-2 filing deadline (January 31) also applies to Forms 1099-MISC on which nonemployee compensation is reported in Box 7. Therefore, employers must provide independent contractors and corporate directors who received at least $600 in cash during 2016 with a Form 1099-MISC, and file them with the IRS by January 31, 2017. The de minimis exception that applies to incorrect W-2s applies to Forms 1099-MISC as well.
Employers must also provide Forms 1009-MISC on which payments are reported in boxes other than Box 7 to payees by January 31. They must file those forms with the IRS by February 28 if filing on paper or by March 31 if filing electronically.
4. Changed ACA Information-Reporting Deadlines, New Instructions
The ACA requires employers to report annually to the IRS and to employees on the group health insurance the employer offered in the previous year. The IRS had extended the deadlines for reporting in 2016. However, for reporting in 2017, the IRS has provided a shorter extension for 2016 ACA information-reporting to employees, and it has not extended the deadline for reporting to the IRS. Employers should keep in mind that there are updated forms and instructions to use for 2016 reporting.
Specifically, employers must:
- Send Form 1095-B and Form 1095-C to employees by March 2; and
- File completed Form 1094-B, Form 1095-B, Form 1094-C and Form 1095-C by February 28 if filing on paper or March 31 if filing electronically.
Failing to meet ACA reporting deadlines can result in significant penalties. For example, failing to timely file information returns or furnish employee statements can cost an employer more than $3 million a year. These amounts can increase if an employer intentionally disregards the reporting requirements. To avoid these penalties, it is important for an employer to know How to Complete and File Forms 1094-C and 1095-C and How to Complete and File Forms 1094-B and 1095-B.
However, for 2016 information returns filed in 2017 only, the IRS will not penalize employers that file these returns with missing and inaccurate taxpayer identification numbers and dates of birth, as well as other information required on the return or statement. This relief is only available to employers that made a good-faith effort to comply.
To determine good faith, the IRS will take into account whether an employer made reasonable efforts to prepare to report the required information and furnish it to employees and other covered individuals (e.g., the employer gathered the data and tested its ability to transmit it to the IRS). The IRS will also take into account the extent to which the employer took steps to ensure that it could comply with the reporting requirements for 2017.
5. Automatic Information Return Filing Extension Repealed
In the past, employers that could not meet their information return filing deadlines could take advantage of IRS regulations that allowed an automatic 30-day extension of time to file certain information returns. Or, they could apply for a non-automatic extension in certain cases.
Starting with 2016 information returns filed in 2017, however, Form W-2 is no longer eligible for the automatic 30-day filing extension under changes to the IRS regulations. Instead, an employer must apply for a single, 30-day non-automatic filing extension.
The IRS will grant the non-automatic filing extension only when an employer has been affected by extraordinary circumstances or a catastrophe (e.g., a natural disaster or fire destroys books and records). If the IRS rejects an employer's request for a filing extension, any returns the employer files after the due date will be considered late, regardless of when the employer filed the request.
For 2017 forms that will be filed in 2018, employers filing any forms in the 1099 series (except Forms 1099-MISC on which nonemployee compensation is reported in Box 7), the 1095 series (i.e., Forms 1095-B and 1095-C, but not Form 1095-A), the 1097 series or Forms 3921 and 3922 may still request one automatic 30-day extension of time to file and an additional 30-day extension for good cause.
However, the IRS has proposed regulations, which it anticipates finalizing in 2017, that will apply the new Form W-2 rules to these forms. If the IRS finalizes these regulations during 2017, filers of these forms will be able to request only one 30-day extension of time to file, beginning with 2018 filing.