Owning a business has a lot of perks and benefits, but it also carries many responsibilities. One of these regular duties is keeping up with payroll. Payroll budgeting, payment, and taxes must be dealt with every pay period, but payroll processing must be analyzed and calculated at the year’s end, too.
If you’re not a careful and organized planner, this time of the year can be full of stress and mistakes. But with these 7 year-end payroll processing tips, you can take a once-overwhelming task and make it simple and streamlined.
7 Time-Saving Tips for the Smart Payroll Processor
By the time you have gotten to the end of the year tax time, you probably have boxes of receipts piled up, hours of tax deductions to review, and more IRS forms than you care to complete. All of this paperwork can result in small and large errors if you don’t tackle it with a plan from the beginning.
Payroll processing involves calculating taxes accurately, determining paid compensation, and figuring out what deductions you qualify for. If it’s done regularly throughout the year, the end of the year process is easier for you to get a handle on. Here are 7 ways to prepare for the annual season to save you time and headaches.
- Know your employee information is accurate. If you make little mistakes regarding your employees’ data, it can be costly to you later. The IRS is allowed to impose penalties on the employer if the submitted W-2 form has any incorrect information on it.
To prevent this from happening, employers should conduct regular audits of their employees’ information to verify that they have the accurate social security numbers, complete names and birth dates, and other vital statistics on file. Your employees’ names must match what is on their social security card when you complete Forms W-2 and 1095-C. The best way to verify this is to obtain a copy of the employee’s social security card when you hire them and store it in a secure place.
Failure to adhere to this basic rule can net you penalities of $50 to $270 per W-2 form depending on when you file the corrected form. There is a maximum penalty limit, but you don’t want to make so many mistakes that you hit that threshold because it’s still at least $545,500 for large businesses or $191,000 for small businesses.
Your office should have a protocol in place for any changes in demographics. Employees should know to complete a new W-4 form if their name, address, or social security information changes at any time.
- Determine your year-end W-2 adjustments. At the end of the year, all of your income should be recorded properly, taxed, and adjusted. This includes cash and non-cash income. Your adjustments may be based on how you file as a corporation and the benefits that you provide your employees.
For instance, you should adjust any third-party sick pay, bonuses, incentive pay, group-term life insurance if it is over $50,000, and other expenses or reimbursements. If you are an S Corporation, you can adjust employer-paid health insurance if you qualify. To ensure you complete this correctly, visit the IRS site to check their requirements and learn how to report this filing.
- Watch for excessive contributions. While you are visiting the IRS site, it’s a good time to check the excess retirement contribution limits. These vary annually. You cannot adjust or deduct more than the annual limits for your contributions to a 401(k), 403(b), or SIMPLE retirement plan.
- Plan the forms that you need to use for insurance reporting. The IRS requires different forms to be completed for ACA Annual Reporting. This depends on the size of your company and how many full-time employees you retain. The breakdown is the 50 mark: 50 or more full-time employees or full-time equivalent employees need one set of forms and rules and less than 50 have another set.
It can start getting complicated and time-consuming here, so many companies choose to hire CPAs like Brown Smith & Wallace to complete their payroll processing for them. But if you are going it alone, here’s a breakdown for you to grab the right forms and file correctly:
- If you have 50 or more employees, you must complete and file both Form 1095-C and 1094-C.
- If you have less than 50 employees that are self-insured, you need to complete and file Forms 1094-B and 1095-B.
- If you’re less than 50 employees are fully insured, the insurer must file on the employer’s behalf, and if those same employees have no insurance, you are not required to report this section at all.
- Note that if you file this information incorrectly or are non-compliant, you may be subject to penalties of up to $700 per return.
- Ensure all checks are processed. In payroll processing, part of the job is to ensure that every check is accounted for, including the manually issued checks and voided ones. Every check must be recorded along with the tax liability for each amount. Any checks that have not been cashed are considered “unclaimed property” and must be reported to the state agency that handles such.
This process is much easier if you account for every check that is written and cashed monthly instead of waiting until the end of the year. Create a system to check your bank statements regularly and record cashed checks to streamline this step.
- Get with your payroll provider for final processing. If you have an outside company that processes your payroll for you, find out which day you can submit your final payroll, work with them to verify the W-2s and data information, and finalize the payroll for that year.
Any days that an employee worked after the final payroll processing are paid in the next year’s check and are not a concern for this year. The payroll tax is based on the date of the check, not the days worked.
- Complete your reports. Now that your payroll processing has been finalized, it’s time to close out all of the necessary reports. You’ve ended a year, but according to the IRS, you’ve also ended a quarter. Every quarter requires a completed Form 941 Employer’s Quarterly Federal Tax Return to be filed by the end of January.
Additionally, you will need to submit all W-2s and 1099s to your employees and independent contractors by the end of the month. This includes any ex-employees who worked in the previous calendar year. Report this income through the appropriately filed reports.
It may be helpful to check with a CPA to compile a checklist of the end of the year reports.
In Review: Things to Complete Before the End of the Year
These 7 tips are meant to help you streamline your closing year processes, but even with guidance, if you have not prepared throughout the year, it can be a stressful time. To recap, here are the most important factors to focus on and ensure you have completed:
- Confirm all of your employees’ identifying information. Get their accurate full legal name as written on their social security card, their social security number, and their current address.
- Verify that all paychecks are recorded correctly, including commissions and bonuses. Record all voided checks, too. Set up a process to identify when a check has cleared and to red flag any outstanding checks so that you can submit them to the appropriate government agency at the end of the year as unclaimed property.
- Check to ensure that your employee wages, benefits, and deductions are accurate and the pay rate is correct.
- Consider ahead which forms you will need to complete. Order these forms for the year ahead. You will likely need Forms W-2 and W-3 every year, so keep them on hand.
- Verify the tax rates for the upcoming year for federal income tax, federal unemployment tax, state income tax, FICA taxes, local income tax, and state unemployment tax. Create a system to pay these taxes on a monthly or semiweekly basis once you have looked at the deposit schedule for the next year.
You Don’t Have to Do It Alone
Running a business is not always the glorified picture that many people envision when they decide to become their own boss. There are a lot of mundane, stressful parts, like accounting, that you are responsible for as an employer. If you don’t have a business degree and a focus in accounting, these parts can cause you stress and take a lot of your valuable time to complete.
Instead of worrying and stressing, many employers choose to put their energy and time elsewhere and hire professionals to complete their payroll and accounting practices for them. It’s a smart investment that lets you take care of your many other roles and hats that you have while those with the training and passion for accounting handle your quarterly and annual requirements.
Consider investing in a reputable CPA or firm if payroll processing isn’t your preferred way of spending your time. You don’t have to do it alone!