2018 Year-End Payroll Filing, ACA Reporting
The end of 2018 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 ever since the paper and electronic filing deadline for Forms W-2, and Forms 1099-MISC provided to independent contractors, was moved up by as much as two months, starting in 2016. The deadline for these forms is now January 31 - the same day that copies are due to payees. This leaves employers with little margin for error.
The following are the key challenges and deadlines of which employers need to be aware.
Limited Filing Extension Requests
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 an employee, 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 the employee's compensation throughout the calendar year.
As in past years, the due date by which an employer must give each employee a copy of his or her current year Form W-2 is January 31 of the following year (i.e., January 31, 2019). Employees need these copies when filing their personal income tax returns. And, regardless of whether an employer files paper copies of the forms or files them electronically, the employer also must file them with the SSA by January 31.
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.
Moreover, the Internal Revenue Service (IRS) issued final regulations in 2018 that allow employers to apply to the IRS for one, non-automatic 30-day extension of time to file Forms W-2 (except for Form W-2G, Certain Gambling Winnings). These regulations promise to compound the impact of the accelerated filing date. Under these final regulations, the IRS will grant a filing extension only if:
- The employer's business suffered a catastrophic event in a presidentially declared disaster area that made the employer unable to resume operations or that made necessary records unavailable;
- A fire, casualty or natural disaster affected the employer's business operations;
- The death, serious illness or unavoidable absence of the individual responsible for filing the information returns affected the employer's business operations; or
- The employer is in its first year of operation.
An employer must complete and file IRS Form 8809, Application for Extension of Time to File Information Returns, to request a filing extension. The IRS indicated in the final regulations that Form 8809 will be revised to reflect a fifth reason for granting a filing extension: The employer did not receive timely data on a third-party payee statement, such as a statement of sick pay. Further, the IRS will grant a filing extension even if an employer receives a third-party payee statement by the statutory furnishing deadline, provided the employer did not receive the statement in time to prepare an accurate Form W-2.
If the IRS rejects a filing extension request, any returns filed after their respective due dates may be considered to have been filed late, regardless of whether or when the application for the extension was filed. However, an employer may still be eligible for a penalty abatement if it failed to timely file Forms W-2 and did not receive an extension of time to file.
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 filing them with the SSA and distributing copies of them to employees. 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;
- The totals for each tax type balance against the total annual payments remitted to the IRS; 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 Protecting Americans From Tax Hikes Act (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 copies of 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 instead of a Social Security Number (SSN). The Act also authorized the IRS to issue implementing regulations. The IRS has 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 furnished to employees in 2019. However, as of the date of this publication, the IRS has not finalized regulations on SSN truncation.
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 sent to employers before individual income tax refunds are issued. Employers are required to respond by providing the requested information on discs in the SSA's RW record format.
Accelerated Form 1099-MISC Filing Deadline
The earlier Form W-2 filing deadline (i.e., January 31, 2019), and the ability to request only one, 30-day non-automatic filing extension, also apply 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 2018 with a Form 1099-MISC and file them with the IRS by January 31, 2019. 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, 2019. They must file those forms with the IRS by February 28, 2019, if filing on paper, or by April 1, 2019 (because March 31, 2019, falls on Sunday), if filing electronically.
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 extended the deadline for reporting to employees in 2018 (but not for reporting to the IRS), and has again extend this deadline for 2018 reports furnished to employees in 2019. For 2018 information reporting in 2019, employers must:
- Furnish Form 1095-B or Form 1095-C to employees by March 4, 2019; and
- File completed Forms 1094-B, Forms 1095-B, Forms 1094-C and Forms 1095-C with the IRS by February 28, 2019, if filing on paper, or by April 1, 2019 (because March 31, 2019, falls on Sunday), 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.
Other Information Return Filing Extensions
Because the IRS bifurcated the filing extension request process, employers must sort out their Forms W-2 and 1099-MISC with entries in Box 7 from all other information returns they are required to file. Those forms must be prepared first, just in case a filing extension is needed.
For all the other information returns (e.g., Forms 1095, 3921, 1099-MISC with entries in boxes other than Box 7), employers may continue to apply for one, 30-day automatic filing extension and one, 30-day non-automatic filing extension.
Unresolved Issues to Monitor
It is not optimal for employers' year-end preparation that the IRS has left a couple of crucial 2018 issues unresolved. Specifically:
- Notice 2018-75 reinstated tax-free reimbursements made by an employer in 2018 for qualified moving expenses that were incurred by employees in 2017, provided the employees did not deduct those expenses on a 2017 Form 1040. The IRS has yet to determine whether Code P reporting for Box 12 on the Form W-2 will also be reinstated for 2018 reporting; and
- Proposed regulations, which the IRS hopes to apply to 2018 reporting in 2019, would require employers that file a total of any combination of 250 information returns to file all returns electronically. If these proposed regulations become final, this would be a significant change from the current e-filing requirements, which require employers to total up the number of each type of information return individually and e-file only those returns that exceed a total of 250.