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Payroll Year-End Practices and Procedures Checklist

Author: Alice Gilman

At the end of every year, employers must file accurate and complete Forms W-2 and W-3 with the Social Security Administration (SSA). And, at the beginning of the following year, they must provide copies of Forms W-2 to employees. The information and wage and tax amounts employers report on Form W-2, Form W-3 and the four quarterly Forms 941 that are filed with the Internal Revenue Service (IRS) should match exactly. Employers also must provide copies of Forms 1099-MISC to independent contractors who have been paid at least $600 in cash for services rendered to the employer; the employer must also file copies with the IRS.

Preparing for year-end is actually a year-long process; the process does not start in January and end in March. By taking a long-view approach to year-end, employers will find that preparing Forms W-2 and 1099-MISC will not be overwhelming and time consuming.

CAUTIONARY NOTE: The Protecting Americans From Tax Hikes (PATH) Act of 2015 substantially impacts year-end processes starting with tax year 2016 filing in 2017.

Beginning with forms filed in 2017, an employer must file paper and electronic Forms W-2 with the Social Security Administration by January 31, and paper and electronic Forms 1099-MISC on which payments to independent contractors are reported in Box 7 with the IRS.

The PATH Act also creates a safe harbor, or an exception, that protects an employer that fails to file correct Forms W-2 or 1099-MISC, or fails to provide an employee or independent contractor with a correct form. Under the safe harbor, unless an employee or independent contractor specifically requests a corrected form (Form W-2c or a corrected Form 1099-MISC), an employer will not be penalized if an otherwise correctly completed form contains a de minimis error. For this purpose, a de minimis error does not exceed $100, or, for errors in tax withholding, $25. This new safe harbor is effective for Forms W-2 and 1099-MISC that are required to be filed in 2017.

In addition, the PATH Act requires an employer to include an employee's "identifying number," instead of a Social Security number (SSN), on Form W-2. This change will permit the IRS to publish regulations that will require or permit an employer to truncate the employee's SSN on his or her Form W-2. An employer may already truncate a payee's SSN on Form 1099-MISC.