Strategies for acing payroll at year-end
| September 25, 2019
The intensity of payroll tends to increase at year-end, which is known as the most hectic time of year for payroll professionals. Without proper planning, things can go off the rails, leaving you with a slew of problems in the new year. To avoid this dilemma, follow these steps.
Considering the huge amount of work that comes with year-end payroll processing, it’s best to start as early as possible — ideally, no later than the beginning of October. This should give you enough time to gather and process the relevant information plus make the necessary changes.
Tackle “Stage 1” Activities
Prior to running your last payroll of the year:
Remind your employees that year-end is imminent. Give them a deadline to submit payroll adjustments — such as changes to their address, direct deposit, Form W-4, and state or local withholding form. Tax withholding changes effective in the current year must be reflected on the respective employees’ Form W-2 for the current year.
Verify that employees’ name and Social Security numbers are correct. This is crucial to ensuring accurate W-2s and reducing the likelihood of you receiving “no-match letters” from the Social Security Administration (SSA).
Double-check paychecks issued thus far for the year. For example, verify timecard records, hourly pay rates, base salaries, regular wages, overtime wages, supplemental wages such as bonuses, and payroll deductions for employee benefits, taxes and wage garnishment.
Confirm that wage deductions do not exceed mandatory limits, such as for Social Security tax, 401(k) contributions, health savings accounts, and flexible spending accounts.
Reconcile your employment tax reports filed so far for the year — such as quarterly 941s — with employees’ year-to-date wages and taxes.
Ensure voided checks and manual checks have been accounted for. Determine whether available paid time off should be rolled over, cashed out, or forfeited.
Handle special items, such as final wages, uncashed paychecks, negative leave balances, and tip allocation.
Work with your HR and finance departments as needed, to resolve year-end issues.
Close out your last payroll of the year after investigating and fixing discrepancies.
Perform “Stage 2” Tasks
After closing out your last payroll of the year but before running your first payroll of the new year:
Update your payroll system to show changes for the new year. These modifications typically involve minimum wage, paid time off, pay rates, employee benefits, and employer and employee taxes.
Balance employees’ last paycheck for the year with W-2 data for that year. Each employee’s W-2 should precisely reflect his or her name, Social Security Number, taxable wages, taxes withheld, and other pertinent information. See the IRS’ instructions for completing Form W-2 and Form W-3 (transmittal form).
File W-2 and W-3 forms with the SSA plus applicable state and local taxation agencies. Furnish W-2s to employees. Typically, employers must file and furnish W-2s by January 31.
Address W-2 reporting errors, such as by filing a corrected W-2 (or Form W-2c) with the SSA and applicable state and local taxation agencies. Give the affected employee a copy of the W-2c.
File your federal, state and local employment tax forms by the mandated deadlines. On a federal level, employers must generally file their federal unemployment (FUTA) taxes on Form 940 and their fourth-quarter 941 form by January 31. The information on your quarterly 941s should align with your submitted W-2s.
Look for excess contributions to qualified retirement plans. If there are excess contributions, you may need to make “corrective distributions,” which can be a hassle to deal with. To avoid having to take corrective action every year, promptly resolve the issue that caused the excess contributions.
Year-End Is Not an Easy Road to Travel
Year-end payroll processing is a complex endeavor that requires a tremendously detailed approach. Depending on your business, your responsibilities may run deeper than stated in this article — or they might vary in some way.
To ensure all grounds are covered, develop and utilize a year-end payroll checklist that’s specific to your business. Remember to revise the checklist whenever related changes occur in your payroll procedures.
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