In addition to tax planning, December is also the time to complete year-end payroll tasks and prepare for the new payroll year ahead. Here are a few reminders to help you close out your payroll responsibilities for this year and to get ready for next year's payroll taxes.
What's New With Payroll Taxes?
Beginning with the 2020 tax year, you must use Form 1099-NEC to report non-employee payments, including payments made to independent contractors. The previous form, Form 1099-MISC, is used only for other miscellaneous payments made in 2020 and going forward.
Annual payroll tax reports (W-2s and 1099-NEC forms) must be given to employees and to non-employees by January 31 of the year following the tax year. January 31 is also the deadline for filing W-2s with the Social Security Administration or 1099-NECs to the IRS.
File W-2s with the Social Security Administration and 1099-NEC forms with the IRS. Be sure you use the correct form for the tax year, not the year you're preparing the form. For example, you'd use the 2020 form to report 2020 income and taxes. Check the year date on the form.
Form W-4 was changed effective January 1, 2020. You must use the revised form as of that date for all new employees and for current employees who want to make changes to their withholding. Current employees don't have to submit a new W-4 form unless they want to make changes.
You must take backup withholding from payments made to non-employees if you've received a backup withholding order. The backup withholding rate has been reduced to 24% as of 2018, down from 28%. You must report backup withholding on the individual's 1099-MISC form if you made any payments during the year, even if the total was less than $600.
Penalties for failing to file and failure to give forms to W-2 forms to employees and 1099-MISC forms to non-employees have increased.
You must file online if you're filing 250 or more of each type of form for 2019 and 2020. W-2s and 1099-MISC forms must be filed online if there are 100 forms beginning in 2021, and you must file online if you have 10 or more forms for tax years after 2021.
The IRS standard mileage rate for business driving for employees and owners is 56 cents per mile in 2021, down from 57.5 cents in 2020.
Check Social Security and Medicare Tax Limits and Add-ons
The 2020 Social Security withholding maximum is $137,700, and the 2021 maximum increases to $142,800. You must stop withholding Social Security from employees when their earnings exceed these amounts for the year.
Employers must continue to pay Social Security tax above the maximum.
An employee who reaches $200,000 in pay for the year must pay an additional Medicare tax of 0.9%. You must begin withholding the additional Medicare tax for the rest of the year. You won't have to pay the additional Medicare tax as the employer, just the regular amount.
The IRS has a specific procedure to follow if you withheld too much or too little from an employee's paycheck. You must correct the error with the employee before the end of the year.
Employee W-4 Form: Employee's Withholding Allowance Certificate
Employees can revise their W-4 forms at any time. The end of the calendar year is a good time to remind them to review their forms to make sure the information is still correct and the amount they want withheld for federal income tax purposes is still accurate. Employees should also check their state's income tax withholding form for changes and withholding amounts if your state imposes an income tax.
Employees can change their W-4 forms as often as they want throughout the year, but not more than once for each paycheck.
Request W-9 Forms for 1099 Payees
You must get a W-9 form from all payees before you prepare 1099-NEC forms or other 1099 forms for non-employees. The W-9 form is similar to the W-2, and it's used to verify the individual's address and tax identification number. The tax ID number is the most important information because the IRS uses this to compare 1099 income reported by taxpayers to that on 1099s filed by payors.
Order W-2 Forms and 1099 Forms
Now is the time to order forms if you send out W-2s, the year-end tax summary for employees, or 1099-NECs, the year-end tax summary for independent contractors.
Check to make sure your payroll service has what they need to prepare these forms if you use one. You'll want to do this early in January because W-2 forms and 1099-MISC forms must be submitted to individuals before the end of the month.
You can get W-2 forms from office supply stores or from the IRS. You can't use a W-2 form or 1099-MISC form that you've downloaded from the Internet because the red ink on Copy A is special and can't be copied.
Verify Social Security Numbers for Employees
Check with the Social Security Administration to be sure employee names and Social Security Numbers match and are accurate before you prepare W-2 forms.
See Social Security's Business Services Online section for more information on how to file W-2s online.
Verify Non-Employee Information Before Sending out 1099-NEC Forms
You must verify the tax ID number for the individual before you send a 1099-NEC form to a non-employee you've paid, such as a contractor or business. You'll have to send out a W-9 form to get the address and tax ID number.
Other Year-End Payroll Tax Tasks
Be sure employee wages are recorded in the correct year. Using the accounting concept of constructive receipt as the date when the person has unrestricted access to the funds is what counts. Put wages into the correct year by using the paycheck date.
The income counts toward January if you're paying employee wages for the last week in December but the paycheck is dated in January. The exception is if you pre-pay wages in December for salaried employees for wages they're owed for January.
Determine how you'll deal with employee paychecks that haven't been cashed for a long time. You must make a sincere effort to find the employee. Use certified letters so you can show proof that the letter was undeliverable. You're required by state law to turn over uncashed paychecks to your state's revenue department if you can't find the employee. They'll continue to try to find the individual.
You'll also have to account for the payroll liability for the uncashed paycheck in your accounting system. The way it's handled will depend on the likelihood that the employee will eventually cash the check. Check with your tax professional to determine how to proceed.
Determine taxable amounts for employee W-2s for certain benefits, including percentages for the personal use of company vehicles and cell phones by owners and employees, and employer-paid educational expenses that might be taxable. Check with your tax professional on the reporting requirements for these benefits.