Payroll Year-End Preparation
Author: Rena Pirsos, XpertHR Legal Editor
At the end of each calendar year all employers are responsible for closing out the year's payroll in compliance with all federal, state and local income and employment tax laws and regulations. This involves much coordination and myriad detailed tasks which, if not carefully planned out in advance, can become nothing less than overwhelming. It also can result in costly penalties if mistakes are made.
Effective year-end preparation is actually a year-long process. As a major part of this process, an employer 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, provide copies of Forms W-2 to employees. The information and wage and tax amounts the employer reports on Form W-2, Form W-3 and the four quarterly Forms 941 that are filed with the Internal Revenue Service (IRS) must match exactly. An employer also must provide copies of Forms 1099-MISC to independent contractors who have been paid at least $600 in cash for services performed and file copies with the IRS.
To complete and file these forms correctly, an employer must monitor not only legislative and regulatory changes that occur throughout the year, but also any changes in the values used to calculate the amount of taxes to withhold from employees' wages, fringe benefits and other payments due to annual inflation adjustments.
Using XpertHR's various tools and resources will help employers establish and follow good payroll practices and procedures all through the year to ensure a successful year-end that is free of noncompliance penalties and fines.
An employer needs to perform certain tasks to make the year-end process easier. Two of the most important include: (i) ensuring the proper amount of income and employment taxes is withheld from the wage, benefit and other payments made to employees throughout the year; and (ii) developing and following a month-by month checklist of effective practices and procedures. The following XpertHR Tasks are available for consultation:
In preparing for year-end, employers must: (i) verify that each employee's name and Social Security Number matches before preparing Forms W-2; (ii) determine which employees will need to file a new or amended Form W-4 for the coming year; and (iii) ensure that supplemental wage payments often made to employees at the end of the calendar year (i.e., bonuses, commissions, prizes and awards) are properly taxed. Step-by-step guidance for employers addressing all of these concerns is available through the following How Tos:
- How to Verify Social Security Numbers
- How to Handle Failed Employee Name/Social Security Number Verifications
- How to Handle IRS Lock-In Letters
- How to Withhold on Supplemental Wages Using the Optional Flat Rate Method
- How to Withhold on Supplemental Wages Using the Aggregate Method
- How to Withhold on Supplemental Wages Over $1 Million
Policies and Documents
The below model checklist, which provides essential month-by-month practices and procedures for keeping the payroll administration process organized all year long, helps employers close out the year with confidence:
XpertHR also provides landing pages for all the federal forms and information returns that employers have to complete, file and distribute at year-end:
- IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
- IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R
- IRS Form 944, Employer's Annual Federal Tax Return
- IRS Form 945, Annual Return of Withheld Federal Income Tax
- IRS Form 1099-MISC, Miscellaneous Income
- IRS Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, and General Instructions
- IRS Form W-2c, Form W-3c, Corrected Wage and Tax Statement and Transmittal Form
- IRS Form W-4, Employee's Withholding Allowance Certificate
Employment Law Manual
Understanding the broader federal, state and local payroll tax rules and regulations employers are required to comply with is essential in devising a successful year-end plan. XpertHR's Employment Law Manual provides helpful comprehensive information and resources, available at the following links:
- Withholding Taxes
- Taxation of Employee Benefits
- Taxation of Employee Compensation
- Unemployment Insurance Tax (FUTA/SUI)
- Depositing and Reporting Withheld Taxes
- International Payroll Issues
- Payroll Solutions
To help employers navigate important differences among states and municipalities, XpertHR offers the following 50-State Charts:
- Unemployment and Disability Insurance Taxable Wage Bases by State
- Temporary Disability Insurance Requirements by State
- Taxation of Supplemental Wages by State
- Minimum Wage Rates by State and Municipality
To eliminate time-consuming research and simplify the job of reprogramming payroll systems for the upcoming year, XpertHR brings essential facts and figures together in these handy Quick Reference charts:
- Social Security and Medicare Tax Rates and Benefit Amounts
- Annual Retirement Plan COLAs and Fringe Benefit Limitations
- Health Care Reform Timeline
XpertHR's Worked Examples illustrate how to perform some of payroll's more complicated calculations:
- Calculation of Gross-Up - Worked Example
- Calculation of Excess Group Term Life - Worked Example
- Calculation of FICA Withholding - Worked Example
- Gross Repayment - Worked Example
- Which fringe benefits are nontaxable to an employee?
- What kinds of transportation fringe benefits may an employer offer its employees on a tax-free basis?
- What payments are considered wages under the federal Internal Revenue Code (IRC)?
- Will the IRS penalize an employer for failing to deposit and report withheld taxes?
- May an employee be paid via a standard 1099?
- How long must an employer keep Forms W-4?
- Of what use is IRS Form 945?
- Is the IRS Form 941-M still in use?
- When does an employer have to comply with the Affordable Care Act's Form W-2 health care reporting requirement?
Related Glossary Terms
- Electronic Federal Tax Payment System (EFTPS)
- FICA (Federal Insurance Contributions Act)
- Fringe Benefit
- FUTA (Federal Unemployment Tax Act)
- IRC (Internal Revenue Code)
- IRS (Internal Revenue Service)
- Lock-in Letter
- Tax Deposit