Almost the entire US federal tax system hinges on one little form – Form W-2, Wage and Tax Statement. As an employee, I take for granted that my employer will correctly complete my W-2, get my copy to me on time (my accountant appreciates that, too) and timely file it with the Social Security Administration (SSA) as well. I know that is a lot to take for granted because this process – year-end – can strike fear into the heart of even the most seasoned payroll manager.
Year-end has never been a walk in the park. Form W-2 looks deceptively simple but it is deviously hard to complete correctly. And gathering the information that is reported on the form doesn’t come from only the Payroll department. Outreach to Benefits for annual 401(k) and cafeteria plan deferral amounts and to Accounts Payable for taxable expense reimbursements is mandatory. However, neither of these departments may be aware of the tight year-end deadlines Payroll has to meet.
As if all of that isn’t challenging enough already, the year-end cycle has become even more challenging since the deadline for Payroll to file Forms W-2 with the SSA was moved up by a whole month in 2016, from the end of February (or the end of March if filing electronically) to January 31. That is the same date by which Payroll has to get copies of W-2 forms to all employees.
Although the filing deadline was accelerated for a laudable purpose – to reduce Form W-2-related identity theft – the loss of those extra months means there is virtually no wiggle room to find and fix errors on the forms before they are filed. Confronted by this new reality, it is no surprise that a greater number of the 2016 forms filed in 2017 with the SSA contained errors.
The accelerated filing deadline puts a premium on year-end preparation and understanding that the key to successfully acing a year-end cycle is a year-long endeavor that requires excellent organizational and tracking skills. Monthly and task-related checklists are essential to this process.
The year-end cycle ramps up in the fall, after the IRS releases inflation-adjusted figures for the coming year. It culminates in the winter when the forms are filed with the SSA. The following are some year-end tasks to check off:
- Ensure that employee withholding is correct throughout the year by:
- Reviewing employees’ Forms W-4 and pretax and after-tax deductions prior to the first paycheck of the new year;
- Using the proper wage-bracket or percentage method tables for income tax withholding; and
- Confirming that the appropriate federal and state taxable wage bases (if necessary) have been entered into the payroll system.
- Reconcile employees’ wages and taxes withheld and accumulate them for year-to-date purposes.
- Verify that the four quarterly Forms 941 that are filed with the IRS match the totals on employees’ W-2s at the end of every pay period.
There are some other tried-and-true techniques payroll managers can use to make the year-end process easier.
Use the SSA’s AccuWage app to check Form W-2 figures. AccuWage Online enables an employer to test the accuracy of its W-2s prior to filing them with the SSA. AccuWage Online generates a report listing the issues found in the employer’s files. Although corrections cannot be made in AccuWage Online, an employer can create new files or correct the files that generated the issues. This process can be repeated until all issues are corrected.
Use the IRS’s de minimis safe harbor for minor math errors. A math error is de minimis if it does not exceed $100 for any single reported amount, or $25 if the error involves withholding or backup withholding. The safe harbor applies automatically, except in cases of intentional errors or failing to file W-2s with the SSA, or with the IRS in the case of Forms 1099-MISC that are provided to independent contractors. While the safe harbor is the default for employers, recipients can elect that the safe harbor not apply. The IRS has established detailed rules that govern the election process for recipients.
Weed out employees who terminate early. Another way to reduce the stress of year-end is to reduce the number of W-2 forms that need to be prepared in January.
A little-known fact is that employees who terminate before the end of a year can make written requests for copies of their W-2s. Employers have 30 days to honor these requests. Although that seems burdensome, the good news is that the IRS does not require such requests to be made in any particular format. So to make things easier, an employer can craft a request form and include it with other termination paperwork, such as 401(k) rollover instructions. Requests can also be signed by departing employees in exit interviews.
While it is too late to consider this policy for employees who have already terminated in 2017, it can be implemented in January without disrupting the termination process.
For more coverage of year-end payroll issues, download XpertHR’s latest whitepaper, Score a Winning Payroll Year-End. Other tips in the whitepaper include:
- To-do lists for each month of the year;
- Descriptions of essential payroll reconciliations and how to ensure they are correct;
- How to leverage free services from the SSA that can make year-end easier; and
- How typical accounting documents, such as the payroll register, general ledger and master control report, can ease year-end calculations.