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7 Tips for Stressless Year-End Payroll Processing
We all know 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 during this busy time of year. Below, we have compiled seven tips to help you eliminate those potential errors during year-end payroll processing so this time of year is a little less stressful.
1. Update Employee Contact Information to Avoid Penalties
Audit employee data to ensure you are not missing critical Form W-2 information like complete Social Security numbers (SSN), 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 will 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 $556,500 ($194,000 for small businesses).
- $110 per Form W-2 if you correctly file more than 30 days after the due date but by August 1, 2020; a maximum penalty of $1,669,500 per year ($556,500 for small businesses).
- $270 per Form W-2 if you correctly file after August 1, 2020, or you do not file required Forms W-2; a maximum penalty of $3,339,000 per year ($1,113,000 for small businesses).
In addition, 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, these types of errors can add up to a large penalty. For some employees, updated addresses can be garnered from a new W-4 if their withholding allowances have changed or will change next year. Remind employees to fill out a new W-4 if their situation has changed and:
- Ensure employee names are entered correctly
- Confirm accuracy of employee addresses
- Confirm accuracy of employee Social Security numbers
Employers need to make sure all employee data is accurate to avoid W-2 reprint fees. If you use a payroll provider, check to see if they offer an online service where employees can review and correct data. If so, encourage your employees to use the service 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.
- 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).
3. Start Processing All Year-End W-2 Adjustments
Before you process your last payroll of 2019, 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 a 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.
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4. Check for Excess Retirement Contributions
|Type of Retirement Plan||2020 Limits*||2019 Limits|
|401(k) Elective Deferrals||$19,500||$19,000|
|403(b) Elective Deferrals||$19,500||$19,000|
|SIMPLE Employee Deferrals||$13,500||$13,000|
*Subject to change
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.
- Account for manual checks written during 2019.
- Confirm that all voided checks have been recorded.
- Report uncashed checks to the appropriate state agency as unclaimed property.
6. Process Final Payroll for 2019
Check with your payroll provider to find out the last day you can submit final 2019 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:
- The spelling of employees’ names
- Social security numbers
Many companies issue bonuses for company performance. If you are issuing bonuses and withholding retirement deductions, make sure the deduction does not exceed the annual limit. It is also important that bonuses are processed before the end of 2019 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 2019 Quarter-End and Year-End Reports
Close the quarter and file the Employer’s Quarterly Federal Tax Return (Form 941) by January 31, 2020, to report payroll taxes and employee wages. Form 941 is typically due by the last day of the month following the end of the quarter.
Employers can be subject to penalties if they:
- Fail to make the tax deposit on time or in the correct amounts
- Made one or more of the deposits to an unauthorized financial institution
- Paid your tax directly to the IRS
- Paid the tax with your return
- Didn’t make the deposits electronically
- Record of Federal Tax Liability was incomplete or illegible
- Liability amounts you reports didn’t equal the next taxes for the tax period
Wrap up calendar year 2019 and prepare to process payroll in 2020. Print and mail W-2s and 1099s to employees and contractors.
Report employee income and withholding amounts to employees, ex-employees who worked in calendar year 2019, and government agencies using Form W-2. Use 1099s to report the income paid to independent contractors and other payees.
One Final Tip
Whether you manage all or sections of year-end processing, its best to stay up to date on tips and best practices to better prepare for this chaotic season. As we venture into one of the busiest times of the year, we hope these tips will help you have the smoothest year-end payroll processing season yet.
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