Year-End Payroll Filing, ACA Reporting

Authors: Rena Pirsos and Tracy Morley, XpertHR Legal Editors

The end of 2017 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. 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) on time became even more challenging when the deadline for filing Forms W-2 and certain Forms 1099-MISC was moved up by as much as two months in 2016. The following are the key challenges and deadlines of which employers need to be aware.

1. Accelerated Form W-2 Filing Due Dates

Every year-end, employers must complete and file with the Social Security Administration (SSA) a Form W-2, Wage and Tax Statement, for each employee on the payroll. They also must provide copies of the forms 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 (e.g., Social Security and Medicare taxes, unemployment and disability insurance 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 2017 copies by January 31, 2018. Employees need these copies when filing their personal income tax returns.

This year-end, however, employers are still getting used to preparing the W-2s much earlier than before. The Protecting Americans From Tax Hikes (PATH) Act accelerated the due dates for filing the forms with the SSA as of the 2016 forms that employers filed in 2017. The filing due dates are:

  • January 31, 2018 (previously March 31), for Forms W-2 filed electronically with the SSA; and
  • January 31, 2018 (previously the last business day of February), for paper Forms W-2 filed with the SSA.

The acceleration of these deadlines means there is virtually no wiggle room for an employer to find and fix errors on the forms before they are filed. Not surprisingly, the accelerated due dates resulted in a greater number of errors on the 2016 forms that were filed with the SSA in 2017.

To make matters worse, many states also accelerated their deadlines for filing copies of Form W-2 to January 31 to align with the changed federal requirements. 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 also have to file their annual reconciliation returns earlier than before.

As a result of these changes, employers must start their withholding and tax payment reconciliations and Form W-2 data-checking processes much earlier than in prior years 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 on time. For example, employers must now move faster 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 on time; and
  • Certain data (e.g., amounts of third-party sick pay, relocation pay, retirement contributions or distributions) are obtained earlier from third-party administrators.

Employers should 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 in previous years 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 the penalty exception for de minimis corrections. Under the PATH Act, employers are not penalized for filing incorrect W-2s if the error is $100 or less, or $25 or less if the mistake involves tax withholding. Employers still must provide Forms W-2c to employees who request them, in which case penalties for filing incorrect W-2s apply.

Employers should note that the PATH Act amended the Internal Revenue Code to require employers to include on employees' W-2 forms an Employee Identification Number (EIN) instead of a Social Security Number (SSN). The Act also authorized the IRS to issue implementing regulations. The IRS has issued proposed regulations that, if finalized, will allow employers to truncate employees' SSNs on the W-2 copies they provide to their employees starting with the 2018 forms issued in 2019.

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, 2018) 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 in 2017 with a Form 1099-MISC and file them with the IRS by January 31, 2018. The de minimis exception that applies to incorrect W-2s applies to Forms 1099-MISC as well.

Employers must also provide Forms 1099-MISC on which payments are reported in boxes other than Box 7 to payees by January 31, 2018. They must file those forms with the IRS by February 28, 2018, if filing on paper, or by April 2, 2018 (because March 31, 2018, falls on Saturday), if filing electronically.

4. ACA Information-Reporting Deadlines

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 has not extended the deadlines for reporting in 2018 as it had in previous years. For 2017 information reporting in 2018, employers must:

  • Send Form 1095-B or Form 1095-C to employees by January 31, 2018; and
  • File completed Form 1094-B, Form 1095-B, Form 1094-C and Form 1095-C with the IRS by February 28, 2018, if filing on paper, or by April 2, 2018 (because March 31, 2018, falls on Saturday), 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 Forms 1094-B and 1095-B.

5. Information Return Filing Extensions

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, and an additional 30-day non-automatic filing extension, which the IRS would grant upon a showing of good cause.

As of 2017, however, Form W-2 is no longer eligible for the automatic 30-day filing extension under changed IRS regulations. Now, an employer must apply for a single, 30-day non-automatic filing extension.

The IRS grants the non-automatic filing extension only when an employer has been affected by extraordinary circumstances or a catastrophe (e.g., a natural disaster or a fire that destroys books and records). For example, employers that fell victim in 2017 to the following natural disasters may qualify for a 30-day extension of time to file their Forms W-2:

  • Hurricane Harvey (employers in Houston and other areas designated as part of the disaster area);
  • Hurricane Irma (employers in Florida and other areas designated as part of the disaster area);
  • Hurricane Maria (employers in Puerto Rico, the US Virgin Islands and other areas designated as part of the disaster area); and
  • The wildfires in Northern California.

If the IRS rejects an employer's request for a filing extension, any returns the employer files after the due date are considered late, regardless of when the employer filed the request.

For the 2017 forms filed in 2018, employers filing any forms in the 1099 series, the 1095 series (i.e., Forms 1095-B and 1095-C) or Forms 3921 and 3922 may 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 that would apply the new Form W-2 rules to these forms. If the IRS finalizes these regulations in 2017, which seems unlikely now, filers of these forms will be able to request only one 30-day extension of time to file for good cause, beginning with forms filed in 2018.