7 Tips for Stressless Year-End Payroll Processing

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SEPTEMBER, 2017

PAYROLL
COMPLIANCE
HR

We all know that year-end payroll processing is a complex method of accurately calculating taxes, compensation, and deductions to be withheld. But many errors occur when common mistakes are overlooked due this busy time of year. Below we have compiled seven tips to help you eliminate those potential errors during year-end payroll processing so you can celebrate the holidays stress-free.

#1 – Update Employee Contact Information to Avoid Penalties

Audit employee data to ensure you are not missing critical Form W-2 information such as complete Social Security numbers, employee names, and addresses. The Internal Revenue Service (IRS) may impose a penalty for each Form W-2 with a missing or incorrect Social Security number or employee name. If there are errors, you would then be subject to the following penalties:

  • $50 per Form W-2 if you correctly file within 30 days of the due date with a maximum penalty of $523,000 ($186,000 for small businesses*).
  • $100 per Form W-2 if you correctly file more than 30 days after the due date but by August 1; a maximum penalty of $1,596,000 per year ($532,000 for small businesses).
  • $260 per Form W-2 if you correctly file after August 1, or you do not file required Forms W-2; a maximum penalty of $3,193,000 per year ($1,064,000 for small businesses).

* As defined by the IRS, you are a small business if your average annual gross receipts are five million dollars or less for the most three recent tax years (or for the period that you were in existence, if shorter) ending before the calendar year in which the Forms W-2 were due.

Furthermore, employee Forms W-2 and 1095-C must match what is printed on social security cards. For example, if an employee’s name is hyphenated on their social security card, but not on their Form W-2 or Form 1095-C, the IRS will return this as an error. Failure to verify this information as correct may result in penalties.

If you are not careful, this can add up to a large penalty. For some employees, updated addresses can be garnered from a new W-4 if their withholding allowances changed or will change in 2017. Remind employees to fill out a new W-4 if their situation has changed:

  • Ensure employee names are entered correctly
  • Confirm accuracy of employee addresses
  • Confirm accuracy of employee Social Security numbers

Employers need to ensure that all employee data is accurate so they can avoid W-2 reprint fees. Employers who use a payroll processing company may have an online service where employees can review and correct data. If so, encourage your employees to use it as a means to review and edit critical data.

#2 – Start Preparing for ACA Annual Reporting

Determine if you had 50 or more full-time and full-time equivalent (FTE) employees in the previous calendar year and what type of insurance (self-insured or fully insured) you offered. If your provider offers an FTE Calculator, you can use it to determine how many full-time and FTE employees you had in the previous calendar year. With this number and the type of coverage you offer, determine what Forms you must use to report:

  • 50 or More Employees – Complete and file Forms 1095-C and 1094-C.
  • Less Than 50 Employees (Self Insured) – Complete and file Forms 1095-B and 1094-B.
  • Less Than 50 Employees (Fully Insured) – Insurer is responsible for filing on behalf of the employer.
  • Less Than 50 Employees (No Insurance) – Reporting is not required.

 

Note: Where the combined total of full-time and FTE employees in a controlled group is 50 or more, each individual employer is subject to reporting.

If you are required to report, gather the information you need to complete applicable forms and determine which reporting method you will be using. Depending on the method you use, you will need to compile information such as:

  • Employee’s name, SSN or date of birth (if SSN is unavailable), and address.
  • Employer’s name, EIN, telephone number, and address.
  • The months in which the employer offered coverage.
  • The employee’s share of the monthly premium for self-only coverage (in certain cases).
  • The months in which a safe harbor (or other situation) applied (i.e., the employee was not a full-time employee).
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Remember: Employers are subject to penalties of up to $700 per return for non-compliance and incorrect information.

#3 – Start Processing All Year-End W-2 Adjustments

Before you process your last payroll of 2017, verify that all non-cash and cash income has been recorded and taxed properly so it is reported on the W-2 and the quarterly 941 tax return. Common W-2 adjustments include:

  • Group-term life insurance in excess of $50,000.
  • Personal use of company vehicle.
  • Third-party sick pay.
  • Company provided transportation or parking.
  • Non-qualified moving expense reimbursements.
  • Non-accountable business expense reimbursements or allowances.
  • Bonuses and other annual incentive pay.
  • Employer-paid education not related to the employee’s job.
  • Non-cash payments.

Another common year-end adjustment is employer-paid health insurance for subchapter S shareholders who own at least two percent of the company. Although it is fairly easy to adjust a W-2 record to reflect this amount, it is always best to include it with a payroll run so it is reported on the applicable quarterly and yearly payroll tax returns. View the IRS requirements for subchapter S filing to make sure your company is reporting correctly.

#4 – Check for Excess Retirement Contributions

Contributions 401(k), 403(b), or SIMPLE retirement plans cannot exceed IRS limits. The limits are as follows:

Type of Retirement Plan2018 Limits2017 Limits
401(k) Elective Deferrals$18,500$18,000
403(b) Elective Deferrals$18,500$18,000
SIMPLE Employee Deferrals$12,500$12,500

#5 – Process All Manual and Voided Checks

Any employee checks issued outside of the regular payroll process must be recorded and their tax liabilities paid in accordance with the applicable due dates. Confirm that all “manual checks” cut during the year have been accounted for and updated in the system. Likewise, all voided checks should be recorded.

Some payroll checks cut throughout the year may not have been cashed. These checks should not be voided in the payroll system, but should instead be considered unclaimed property and reported to the appropriate state agency. The unclaimed property office may be a division of your state’s department of revenue or treasurer’s office.

To recap:

  • Account for manual checks written during 2017.
  • Confirm that all voided checks have been recorded.
  • Report uncashed checks to the appropriate state agency as unclaimed property.

#6 – Process Final Payroll for 2017

Check with your payroll provider to find out the last day you can submit final 2017 payrolls to avoid penalties and interest charges. Make sure to review your W-2s to verify the following information prior to processing your last payroll of the year:

  • Spelling of employees’ names
  • Social security numbers
  • Addresses
  • Wages

Many companies issue bonuses for company performance. If bonuses are being issued and retirement deductions are being withheld, make sure that the deduction does not exceed the annual limit. It is also important that bonuses are processed before the end of 2017 so tax payments are made on time to avoid penalties.

If you have to run another payroll before the end of the year, you will have to review your company, employee, and contractor totals again.

Remember: Earnings and deductions for payments received in the next year for days worked in the current year are reflected in the new year. Payroll taxes are based upon the date wages are paid.

#7 – Process 2017 Quarter-End and Year-End Reports

Close the quarter and file Form 941 Employer’s Quarterly Federal Tax Return by January 31, 2017. Close calendar year 2017 and prepare to process payroll in 2018. Print and mail Form W-2s and 1099s to employees and contractors.

Report employee income and withholding amounts to employees, ex-employees who worked in calendar year 2017, and government agencies using Form W-2. Use 1099s to report the income paid to independent contractors and other payees.

How APS Can Help

APS is your source for managing year-end payroll and HR processing like a champ! Each year, thousands of payroll and HR managers trust APS as their source for year-end payroll, HR, tax, and ACA processing. Visit our Year-End Payroll and Year-End HR guides to help you focus on which tasks to tackle so you can enter 2017 with confidence.

Sources

IRS General Instructions for Forms W-2 and W-3, Penalties Section

IRS Form W-2 Reporting of Employer-Sponsored Health Coverage

IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, Identification of Full-Time Employees

IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, Liability for the Employer Shared Responsibility Payment

IRS Questions and Answers on Reporting of Offers of Health Insurance Coverage by Employers (Section 6056)

IRS Requirements for S Corporations

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