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A New Take on New Year’s Resolutions: Planning Ahead for Year-End Payroll Processing

The Mother of All Year-End Payroll Processing Checklists

Today’s we will cover a checklist-level methodology to better plan and organize year-end activities. This information pretty  much mirrors what I presented in my webinar last month. I’ve had some requests to get all this information in a checklist format, so here’s my attempt at that.

Year-end has two phases:

  • BEFORE your LAST PAYROLL of the calendar year
  • AFTER your LAST PAYROLL, but BEFORE the FIRST PAYROLL of the NEW calendar year

BEFORE the LAST PAYROLL of the calendar year, in addition to your normal verification procedures, do the following:

Validate employee and employer indicative data.

  • Verify the employer and employee data that will be used for processing your quarterly tax reports and W-2s
  • Verify which employees will be impacted by the “retirement plan” indicator for Box 13 of Form W-2
  • Verify which employees are classified as Statutory employees for Box 13 reporting
  • Confirm  employee name, address and Social Security numbers are in the correct format
  • The IRS may impose a penalty for each Form W-2 with a missing or incorrect Social Security number or employee name
  • Ensure that deceased employees are properly coded for reporting on the W2

Validate wage, tax and benefits data.

  • Confirm that deferred compensation plan types are correct and verify employee contribution amounts
  • Verify Group-Term Life Insurance adjustments have been updated
  • Ensure special reporting situations for Form W2 have been updated, such as:
    • Adoption benefits
    • Deceased employee’s wages
    • Golden parachute payments
    • Group-term life insurance
    • Heath Savings Account (HSA)
    • Third-party sick pay
    • Employee business expense reimbursements
    • Taxable fringe benefits
    • Trip allocation information
    • Dependent benefits from one of the best dentist in Chattanooga
    • Income from the exercise of nonstatutory stock options
    • Designated Roth contributions
    • Salary deferral plans (401k, 403b, 408k, 408p, 409a, 457b)
    • Educational assistance programs
    • Employee’s social security and Medicare taxes paid by employer
    • Moving expenses
    • Uncollected Social Security tax
    • Nontaxable combat pay
    • Employer contributions to an Archer MSA
    • Cost of employer-sponsored health coverage
    • Personal use of company car
  • Verify the employer state unemployment insurance tax rate and taxable wage limit for each state
  • Compute uncollected Social Security and Medicare taxes for retirees and former employees
  • Verify accuracy of withholding for taxable fringe benefits. These may include:
    • Group-term life insurance in excess of $50,000
    • Third-party sick pay (is the third party issuing the W-2)
    • Personal use of company vehicle or plane
    • Non-qualified moving expense reimbursements
    • Company-provided transportation or parking
    • Employer-paid education not related to the employee’s job
    • Non-accountable business expense reimbursements or allowances
    • Non-cash payments
  • Check for required backup withholding; verify amounts

Additional considerations:

  • Verify year-end system updates are applied in a timely manner. Test, test and re-test before applied to production environment
  • Request  special reports/files that may be required for year-end
  • Ensure adequate payroll supplies are complete for year end and to begin the new year, including (1) check stock, (2) payroll forms and envelopes and (3) year-end forms (W-2, W2C, 1099R)
  • Remind employees to fill out a new Form W-4 if their situation has changed
  • Publish a reminder for employees to validate their mailing address – preferably a check message before the final check of the year
  • Be sure all adjustments are applied:
    • Confirm all “manual” checks created outside the payroll system have been entered
    • Verify voided or reversed paychecks have been accounted for in the system
  • Create a processing schedule/project plan to meet year end filing deadlines
  • Payroll bank reconciliations should be completed successfully

So. Whew. That’s the first (and longest) part of this checklist.

Now, AFTER the LAST PAYROLL, but BEFORE the FIRST PAYROLL of the NEW calendar year, do the following:

Validate employee and employer indicative data.

  • Review discrepancies such as missing addresses, and missing or invalid Social Security numbers

Validate wage, tax and benefits data.

  • Review discrepancies such as negative quarter and/or year-to-date fields, and qualified pension-coding discrepancies
  • Verify the employer’s new state unemployment insurance tax rate and taxable wage limit for each state where the employer has workers
  • Verify new state disability insurance rate and taxable wage limit, where applicable
  • Test reasonableness of Social Security tax withholding for both employee and employer amounts
  • Test the reasonableness of state unemployment insurance tax (verify taxable wages and multiply by the employer experience rate)
  • Verify that employee requests for fringe benefit deduction changes for the new year have been applied

Verify for special procedures.

  • Schedule any special bonus payrolls
  • Verify that the payroll new year month-end closeout dates are accurate
  • Verify that management reports for the new year are scheduled, and will include the correct weeks and process
  • Confirm that for the new year the schedule of pay dates, period ending dates and quarter closing dates, are as intended and do not fall on holidays or weekends

Year-end balancing.

  • Compare W-2 report totals to Form W-3 totals
  • Compare Forms W-2 to State and local report and totals
    • Ensure reported taxes from Form W-3 equal tax deposits
  • Check for excess contributions to qualified plans, including 401(k), 403(b) and SIMPLE plans, especially for highly-compensated employees
  • Check for required tip allocations for tipped employees

Finally (!!!), here are a few basic tips to follow to confirm that your quarterly reports are in balance with your annual reports.

The IRS matches amounts reported on your four quarterly Forms 941 with Form W-2 amounts totaled on your yearly Form W-3, Transmittal of Wage and Tax Statements. If the amounts do not agree, the IRS or the Social Security Administration (SSA) may contact you. The following amounts are reconciled:

  • Federal income tax withholding
  • Social Security wages
  • Social Security tips
  • Medicare wages and tips

I know this has been a ton to digest, and it is long checklist. But trust me when I say this is a collection of best practices I’ve culled over the years. If you have any questions about any of this, please feel free to reach out to MIPRO or try Goodwin Barrett. We’re happy to help clarify this process if need be.

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