Year-End Payroll Tax Tasks for Employers
In addition to tax planning, December is also the time to complete year-end payroll tasks and prepare for the new payroll year. Here are a few reminders to help you close out your payroll for this year and get ready for next year's payroll taxes.
What's New With Payroll Taxes?
Filing Date Same for Recipients and Federal Filing. Annual payroll tax reports (W-2s and 1099-MiSC forms) must be given to employees and non-employees by January 31 of the following year. January 31 is also the deadline for filing these reports with the Social Security Administration (W-2s) or the IRS (1099-MISC).
File W-2s with the Social Security Administration and 1099-MISC forms with the IRS. Be sure you use the correct form for the tax year, not the year you are preparing the form. For example, use the 2019 form to report 2019 income and taxes. Check the year date on the form.
Changes in Employee Withholding and W-4 Form. The Tax Cuts and Jobs Act may result in lower taxes for some taxpayers for 2018 and beyond. This may mean that employees will be asking to change their withholding on their W-4 forms.
The W-4 form has been changed, and you must use the new w-4 form beginning January 1, 2020, for all new employees and for current employees who want to make changes to their withholding. Current employees don't have to use the new W-4 form unless they want to make changes.
Change in Backup Withholding Rate. For non-employees, you must take backup withholding from their payments if you received a backup withholding order. The backup withholding rate has been reduced (for 2018 and beyond) to 24 percent, down from 28 percent. 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.
Increase in penalties. 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. Read more about these increased penalties.
Upcoming change in the requirement to file annual information forms online. For 2019 and 2020, you must file online if you are filing 250 or more of each type of form. Beginning in 2021, W-2s and 1099-MISC forms must be filed online if there are 100 forms, and for tax years after 2021, you must file online if you have 10 or more forms. Read more about how to file W-2 forms and 1099-MISC forms online.
Check Social Security and Medicare Tax Limits and Add-ons
Social Security Maximum. Check to make sure you have stopped withholding Social Security tax from higher-income employees. Stop withholding at the Social Security maximum for the current year. (You as the employer must continue to pay Social Security tax above the maximum.)
Additional Medicare Tax. An employee who reaches $200,000 in pay for a year must pay an additional Medicare tax of 0.9%. You must start withholding the additional Medicare tax for the rest of the year. You as the employer won't have to pay the additional Medicare tax, just the regular amount.
If you withheld too much or too little from an employee's paycheck? The IRS has a specific procedure to follow, and you must correct the error with the employee before the end of the year.
Employee W-4 Form: Employee's Withholding Allowance Certificate
Employees may complete W-4 forms at any time, and the end of the calendar year is a good time to remind them to review their W-4 to make sure the information is accurate, and the amount they want to be withheld from federal income taxes is accurate. If your state requires an income tax, employees should also check their state's income tax withholding form for changes and withholding amounts.
Just a reminder that employees can change their W-4 forms as often as they want throughout the year, but they can't change more than once for each paycheck.
Request W-9 Forms for 1099 Payees
Before you prepare 1099-MISC or other 1099 forms for non-employees, you must get a W-9 form from all payees. The W-9 form is similar to the W-2 form, and it's used to verify the person's address and tax identification number. The tax ID number is the more important information because the IRS uses this to match 1099s filed by taxpayers with 1099s filed by employers.
Order W-2 Forms and 1099-MISC Forms
If you send out your W-2 forms (the year-end tax summary for employees) and 1099-MISC forms (year-end tax summary for independent contractors), now is the time to order forms for this tax year.
If you have a payroll service, check to make sure they have what they need to prepare these forms in January. Remember, W-2 forms and 1099-MISC forms must be submitted to individuals before the end of January.
You can get W-2 forms from office supply stores, or from the IRS. You cannot use a W-2 form or 1099-MISC form you download from the Internet because the red ink on Copy A is special and can't be copied.
Verify Social Security Numbers for Employees
Before you prepare W-2 forms, check with the Social Security Administration to be sure employee names and Social Security Numbers match and are accurate.
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-MISC Forms
Before you send a non-employee, like a contractor or business that you have paid, you must verify the tax ID number for that person. As noted above, you'll need to send out a W-9 form to get the address and tax ID number.
Other Year-end Payroll Tax Tasks
Timing of Employee Wages. 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. So put wages into the correct year by using the paycheck date.
If you are paying employee wages for the last week in December, but the paycheck is dated in January, that income counts toward January. The exception is if for some reason you pre-pay wages in December, for salaried employees, for wages they are owed for January.
Read more about timing employee paychecks at year-end, as well as other year-end income and expense timing issues.
Uncashed Paychecks. Determine how you will deal with employee paychecks that have not been cashed for a long time. You must make a sincere effort to find the employee (use certified letters so you can show that the letter was undeliverable). If you can't find the employee, you are required by state law to turn over un-cashed paychecks to your state revenue department. They will continue to work to find the individual.
You will also need to account for the payroll liability for the un-cashed paycheck in your accounting system. The way it's handled depends on the likelihood that the employee will cash the check. Check with your tax professional on this one.
Taxable Benefits. 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 may be taxable. Check with your tax professional on the reporting requirements for these benefits.
IRS. "FAQs on the draft 2020 Form W-4." Employer FAQs. Accessed Nov. 18, 2019.
IRS. "ITG FAQ #3 Answer-What is backup withholding?" Accessed Nov. 15, 2019.
IRS. "2019 Instructions for Form 1099-MISC." Specific Instructions, Page 1. Accessed Nov. 15, 2019.
IRS. "General Instructions for Forms W-2 and W-3." Penalties, Page 13. Accessed Nov. 18, 2019.
IRS. "General Instructions for Certain Information Returns." Penalties, Page 17. Accessed Nov. 18, 2019.
U.S. Congress. H.R. 3151. "Sec. 2301. Electronic Filing of Returns," Page 32. Accessed Oct. 8, 2019
IRS. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Nov. 18, 2019.
IRS. "General Instructions for Certain Information Returns." J. Recipient Names and Taxpayer Identification Numbers (TINs). Page 12. Accessed Nov. 18, 2019.
IRS. "2019 1099-MISC Miscellaneous Income." Attention: Page 1. Accessed Nov. 18, 2019.
IRS. "W-2 Wage and Tax Statement." Attention: Page 1. Accessed Nov. 18, 2019.
U.S. Securities and Exchange Commission. "Escheatment Process. Accounts - Abandoned or Unclaimed." Accessed Nov. 18, 2019.