Year-end is a hectic time for most businesses. December is especially busy for the Payroll Department due to short holiday work weeks and employee vacations. Listed below are a few payroll tasks that need to get done before the end of the year.
• During the month of December, you should ask your employees to verify the information on their paycheck. They should pay close attention to the spelling of their name, address, and zip code. Any discrepancies found should be reported to your office immediately. Updating address changes will reduce the amount of time spent fielding phone calls and reprinting W2s.
• Remind your employees to update their Form W-4. Employers are required to remind employees before Dec. 1 each year to submit a new W-4 Form if their withholding allowances have changed or will change for the upcoming year. Some of the more common reasons an employee would want to change the number of allowances claimed are the employee got a second job, got married or divorced, or had a baby.
• Employees claiming exemption from withholding. In order to continue to be exempt from withholding in the next tax calendar year, employees must give their employer a new W-4 claiming exempt status by Feb. 16 of that year. If an employee fails to give you a new properly completed Form W-4 claiming exempt, you should withhold federal income taxes from their wages as if he or she were single and claiming no withholding allowances.
Year End Adjustments and Interim Payroll Runs
• For payrolls dated December 31st, be sure to allow adequate time for direct deposit to post to the employees bank account and/or allow enough time for the employee to get to the bank to cash their pay check. You don’t want to be challenged with questions regarding constructive receipt. Constructive receipt is often very difficult to determine. If an employee is issued a check dated Dec 31st but doesn’t receive it until Jan 2nd then it doesn’t count as taxable income in the tax year indicated by the date on the check. However, if an employee receives a check dated Dec 31st on the last day of the year but chose not to cash it until Jan 2nd, the employee constructively received and could have cashed the check in the year in which it was issued so it is taxable in the year on the check.
Taxable Fringe Benefits
• Any fringe benefit provided to an employee is taxable income unless the tax law specifically excludes it from taxation. Taxable fringe benefits must be included as income on the employee’s W-2 and is subject to withholding. Some examples of a taxable fringe benefit are Personal use of a Company Vehicle, Group Term Life Insurance over $50, 000, Third Party Sick Pay, and the Cost of Premium for Health Insurance coverage provided by an S-Corporation to its 2% or more Shareholders.
• Check to make sure that you do not have any employees that may have exceeded the contribution limit for deductions that have yearly payroll restrictions. Some examples of these deductions are 401(k), Health Savings Account, Flexible Spending Account, and Dependent Care Flexible Spending Account.
• Review instructions for the Form W-2 and W-3 issued by the Internal Revenue Service (IRS) and pay special attention to the What’s New section. Go through your Earnings and Deduction codes to make sure they are flagged appropriately to coincide with the IRS codes previously designated for that item to be reported in box 12 on the W-2.
• Reconcile your taxable earnings for each quarter to the Form 941 Employer’s Quarterly Federal Tax Return. If they don’t match you will need to find the difference before generating W2s.
For more information on rehiring former employees, please reach out to Genesis HR Solutions at AskUs@genesishrsolutions.com or 800-367-8367.
Genesis HR Solutions is the premier PEO provider for Massachusetts based businesses.