Payroll Practices and Procedures Checklist
Author: Alice Gilman
When to Use
At the end of every calendar year, 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. However, to prevent the process from becoming overwhelming at year-end, an orderly and methodical plan of payroll practices and procedures should be mapped out and followed throughout the entire year.
Using the following checklist every pay period, and every month (in month order), will help an employer stay in control of payroll responsibilities all year long and easily tackle year-end challenges.
Year-End 2020/2021 Changes
Note that the year-end process for 2020 is uniquely challenging due primarily to COVID-19 and related CARES Act relief provisions. The resulting changes are reflected in the checklist, including:
- For 2020, Form W-2 reporting and notification of paid sick leave and paid emergency leave taken by employees under the Families First Coronavirus Response Act (FFCRA) in Box 14;
- Reporting teleworkers' wages to state agencies in compliance with state nexus requirements during COVID-19;
- Claiming the tax credit on Form 941 for FFCRA paid leave provided to employees, and the Employee Retention Credit against wages paid to qualified employees during the period of March 13, 2020, through December 31, 2020, as well as using Form 941-X to make any Form 941 corrections; and
- Reporting the payment of deferred Social Security tax deposits on Form 941.
Other changes for year-end 2020 and 2021 reflected in the checklist include:
- Final regulations that permit, but do not require, an employer to truncate employees' Social Security numbers on all Form W-2 copies, except Copy A; and
- Form 1099-NEC, Nonemployee Compensation, reporting of payments of at least $600 in cash to independent contractors (which were formerly reported on Form 1099-MISC).
Preliminary Year-End 2021/2022 Changes
On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law. The CAA extends an employer's payroll tax credits for providing paid FFCRA leave to employees through March 31, 2021, without extending the requirement to provide paid leave. However, an employer may voluntarily extend paid leave for qualified employees in 2021. Accordingly, if an employer does choose to extend paid leave in 2021, it should be prepared to:
- Report the leave provided on the 2021 Form W-2 under the same conditions that applied to reporting paid leave on the 2020 Form W-2;
- Continue using the appropriate earnings codes to track paid leave; and
- Report the amount of extended leave, and the tax credit taken, on the first-quarter Form 941.