Q4 has arrived and that means it’s time to begin preparing for year-end. Waiting until December to complete all of your year-end tasks is not an option this year. Along with satisfying the typical payroll obligations, this year employers must adhere to fresh rules – including new overtime guidelines and an earlier W-2 filing date. With the flurry of activity surrounding payroll at year-end, starting early and having a checklist of key tasks is vital to gaining direction and reducing stress. Here’s how you can prepare now for a successful year-end.
BEFORE RUNNING YOUR LAST PAYROLL OF THE YEAR
Verify Employee Personal and Tax Information
- Employee name, address and Social Security number
- W-4 information, including marital status, number of allowances and any additional federal income tax to withhold
- State and local withholding tax form data
Employees can submit a new W-4 or state tax form whenever they need to update their tax information, so make sure you’re using the most recent form.
Double-check Wages, Salaries, Benefits and Deductions
- Confirm that employees’ hourly pay rate and salaries are correct. Remember that the new federal overtime rule goes into effect Dec. 1, 2016, which makes this step especially important during year-end processing (more on this later).
- Check supplemental wages – such as overtime, commissions, bonuses, retroactive pay and severance pay – to ensure proper taxation.
- Confirm that benefit plan types – including pretax plans – plus employee and employer contributions are correct.
- Verify special tax items, such as taxable fringe benefits, tip allocation, and employee business expense reimbursement.
- Check withholding information for wage garnishment and child support.
Pay special attention to taxable fringe benefits – such as noncash payments and group-term life insurance over $50,000 – which must be included in the employee’s taxable W-2 wages.
Also, make note of employees who have already met or will soon meet the annual wage base for Social Security withholding ($118,500) and those who qualify for additional Medicare withholding, which is an additional 0.9 percent on wages above certain threshholds based on filing status.
Verify Employer Taxes
Go over employment tax reports sent throughout the year to the IRS and state/local revenue agencies, such as quarterly 941s. This helps ensure that your reports are correct thus far and are in sync with employees’ year-to-date payroll information.
Employer taxes to review include:
- Social Security tax
- Medicare tax
- Federal unemployment tax
- State unemployment tax
W-2 errors can be avoided by reviewing employees’ payroll information and employer tax reporting data prior to running the last payroll of the year. Typically, W-2 errors stem from incorrect:
- Employee name
- Employee Social Security number
- Employer identification number
- Form codes for retirement plans
- Wages and taxable fringe benefits reporting
- Withholding reporting
Keep an Eye Out for Former Employees
Past employees who received wages in 2016 must also receive a W-2. If you can, contact former employees to verify current mailing address and make any updates prior to printing W-2s.
AFTER RUNNING YOUR LAST PAYROLL OF THE YEAR
Balance each employee’s last paycheck for the year and W-2 data with your year-end employment tax reports. If paycheck or W-2 errors are found, correct them before issuing and filing W-2s.
Also, look for uncashed paychecks. If there are any, you may contact the employee or former employee and issue a reminder to cash the paycheck. If you cannot find the employee or if the check remains uncashed, contact the state revenue department. Uncashed paychecks fall under the state’s unclaimed property, or escheat, laws.
Section 201 of the Protecting Americans from Tax Hikes Act of 2015 requires employers to file Forms W-2 and W-3 with the Social Security Administration (SSA) earlier in 2017. Prior to this law, employers had until the end of February or March to file, depending on whether W-2s are filed by paper or electronically.
Starting with 2016 W-2s, both paper and electronic W-2 and W-3 forms must be filed by January 31. In addition, employers must distribute W-2s to employees by January 31. Note that these filing deadlines also apply to 1099-MISC forms.
The new W-2 deadline means that employers have less time to make last-minute W-2 changes. Here are some preparation tips to ensure accurate and timely filing:
- Order W-2 and W-3 forms early this year. Be sure to use the most up-to-date version of the forms.
- Start W-2 processing as early as possible so you have enough time to make the necessary adjustments.
- Make adjustments as soon as you find the discrepancy instead of waiting until later.
If you discover a W-2 error after filing the form, file a corrected Form W-2c and W-3c with the SSA. Also, provide the employee with a Form W-2c.
Tax and ACA Reporting
Make sure your last quarterly tax report for the year and your annual reports are correct before filing them with the IRS and state/local taxation agency. This includes your fourth quarter 941 and Form 940 (Employer’s Annual Federal Unemployment Tax Return) – which are due to the IRS by January 31.
For 2016 Affordable Care Act (ACA) reporting, applicable large employers must:
- State the cost of employer-provided health care coverage on Form W-2. An exception currently applies to employers filing fewer than 250 W-2s.
- Distribute ACA Form 1095 to employees by Mar. 2, 2017.
- Send Forms 1094-C and 1095-C to the IRS by Feb. 28, 2017 if filing by paper, and by March 31, 2017 if filing electronically. Last year the IRS extended these deadlines but an extension is not expected this year.
MORE ON THE NEW FEDERAL OVERTIME RULE
Under the new Fair Labor Standards Act overtime rule, employers must:
- Pay exempt executive, administrative and professional employees no less than $913 per week. Any employee earning less than that amount must receive overtime pay if they work more than 40 hours per week.
- Pay exempt highly compensated employees no less than $134,004 per year.
Employers may use nondiscretionary bonuses and commissions to satisfy up to 10 percent of the new minimum salary requirement.
With the rule slated to take effect on Dec. 1, 2016, come year end, it’s crucial to verify that affected employees are properly classified and paid.
Note: Twenty-one states and over 50 business groups have sued the DOL in an attempt to block the new rule. On Sept. 28, 2016, the U.S. House of Representatives passed a Republican-backed bill that would delay the overtime rule by six months – from Dec. 1, 2016 to June 1, 2017. But, the bill is likely to face strong opposition from Senate Democrats. In addition, the Office of Management and Budget has said if the president is presented with the bill he would veto it.
The general consensus is that employers should continue preparing for the Dec. 1, 2016 effective date.
Update November 23, 2016: A preliminary injunction issued by a federal judge has delayed the new FLSA overtime rule that was set to take effect December 1. With the delay in the rule, employers are not required to meet the rule's increased salary threshold of $47,476 for exempt status starting December 1. The rule will continue to be reviewed by the court and a final decision will be issued at a later date.