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September, 2021

7 Tips for Year-End Payroll Processing

What do colorful tree leaves, pumpkin spice flavorings, and year-end payroll processing have in common? They all mark the onset of fall, a busy season for payroll and HR managers alike. Because this time of year is so overwhelming, it’s challenging to know the best way to manage year-end payroll processing. So, how can you approach year-end more proactively?

We have compiled seven tips to help you eliminate potential errors during year-end payroll processing. After reading this article, you’ll understand year-end payroll processing, penalties to avoid, tax forms to utilize, and important year-end dates. You’ll also learn how to streamline this process for your employees. Our goal is to provide you with a proactive and efficient approach to tackle year-end payroll once and for all.

What Is Year-End Payroll Processing?

Year-end payroll processing is a complex method of accurately calculating taxes, compensation, and deductions to be withheld from employee paychecks. It usually takes place during the fourth quarter of the calendar year, through the first quarter of the following year.

Year-end processing ensures your company’s payroll and taxes are compliant with current federal, state, and local regulations. If your organization isn’t compliant, it can lose money to fees and regulatory costs. Therefore, actively participating in year-end payroll processing saves you future noncompliance headaches and your organization loss in revenue.

What Is End-to-End Payroll Processing?

End-to-end payroll processing connects payroll and HR data in one platform. Without end-to-end payroll, companies use multiple systems for employee performance, benefits administration, and recruitment. It eliminates the costs associated with using various platforms and the headache of managing numerous data points.

All-in-one payroll and HR solutions provide their customers with end-to-end software to streamline this information once and for all. These systems offer payroll and HR managers the benefit of automated tasks, advanced analytics, online recordkeeping, and improved efficiency.

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Tips for Procssing Year-End Payroll

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1. Update Employee Contact Information to Avoid Penalties

Audit employee data to ensure you are not missing critical Form W-2 information like complete Social Security numbers (SSN), employee names, and addresses. The Internal Revenue Service (IRS) may impose a penalty for each Form W-2 with a missing or incorrect Social Security number or employee name. If there are errors, you will be subject to the following penalties:

  • $50 per Form W-2 if you correctly file within 30 days of the due date, with a maximum penalty of $556,500 ($194,000 for small businesses).
  • $110 per Form W-2 if you correctly file more than 30 days after the due date but by August 1, 2020; a maximum penalty of $1,669,500 per year ($556,500 for small businesses).
  • $270 per Form W-2 if you correctly file after August 1, 2020, or you do not file the required Forms W-2; a maximum penalty of $3,339,000 per year ($1,113,000 for small businesses).

It’s important to remember that any employee information on Forms W-2 and 1095-C must match their social security cards. For example, if an employee’s name is hyphenated on their social security card but not on their Form W-2 or Form 1095-C, the IRS will return this as an error. Failure to verify employee information correctly may also result in business penalties.

If you are not careful, these types of errors can add up to a substantially larger penalty. In some cases, it’s easy to obtain updated employee addresses. However, this usually only applies to employees who have updated their W-4 because of a withholding change. Here are the reasons employees need to adjust their W-4:

  • The employee gets a second job
  • Employee’s spouse gets a job or changes jobs
  • The employee was unemployed for part of the year
  • Employee got married or divorced
  • Employe had a child or adopted one

Remind employees to fill out a new W-4 if their situation has changed and:

  1. Ensure names get entered correctly
  2. Confirm the accuracy of employee addresses
  3. Confirm the accuracy of employee Social Security numbers

Employers need to make sure all employee data is accurate to avoid W-2 reprint fees. If you use a payroll provider, see if they offer self service software or an online site where employees can review and correct data. If so, encourage your employees to use the service to review and edit critical data.

APS Icon Sheet_ACA Reporting

2. Start Preparing for ACA Annual Reporting

Determine if you had 50 or more full-time or full-time equivalent (FTE) employees in the previous calendar year. If your payroll and HR provider offers an FTE Calculator, you can use it to determine how many full-time and FTE employees you had in the previous calendar year.

Also, check to see what type of insurance (self-insured or fully insured) you offered employees. Your FTE number and the type of coverage offered to employees determine what forms you must use to report on:

  • 50 or More Employees: Complete and file Forms 1095-C and 1094-C.
  • Less Than 50 Employees (Self-Insured): Complete and file Forms 1095-B and 1094-B.
  • Less Than 50 Employees (Fully Insured): The insurer is responsible for filing on behalf of the employer.
  • Less Than 50 Employees (No Insurance): Reporting is not required.
ACA Reporting

Note: Where the combined total of full-time and FTE employees in a controlled group is 50 or more, each individual employer is subject to reporting.

If you are required to report, gather the information you need to complete the applicable forms and determine which reporting method you will be using. Depending on the method you use, you will need to compile information like:

  • Employee’s name, SSN or date of birth (if SSN is unavailable), and address.
  • Employer’s name, Employee Identification Number (EIN), telephone number, and address.
  • The months in which the employer-offered coverage.
  • The employee’s share of the monthly premium for self-only coverage (in certain cases).
  • The months in which a safe harbor (or other situation) applied (e.g., the employee was not a full-time employee).
ACA Reporting

Remember: Employers are subject to penalties of up to $700 per return for non-compliance and incorrect information.

W-2 Adjustments

3. Start Processing All Year-End W-2 Adjustments

Before you process your last payroll of 2021, it’s essential to make all year-end W-2 adjustments. Consider the impact unreported fringe benefits can have on federal income taxes. Common fringe benefits and W-2 adjustments include:

  • Group-term life insurance in excess of $50,000
  • Personal use of a company vehicle
  • Third-party sick pay
  • Company-provided transportation or parking
  • Non-qualified moving expense reimbursements
  • Non-accountable business expense reimbursements or allowances
  • Bonuses and other annual incentive pay
  • Employer-paid education not related to the employee’s job
  • Non-cash payments
ACA Reporting

Note: It’s also important to verify that all non-cash and cash income was recorded and reported on Form W-2 and the quarterly 941 tax return. Verification ensures your tax information is accurate and up-to-date.

S Corporations

Another standard year-end adjustment is employer-paid health insurance. This adjustment is for subchapter S shareholders who own at least two percent of the company. It is relatively easy to adjust a W-2 record to reflect this amount. However, it is always best to include it with a payroll run.

Including employer-paid health insurance on a payroll, run ensures accurate reporting for quarterly and yearly payroll tax returns. View the IRS requirements for subchapter S filing to make sure your company is reporting correctly.

Year-End Processing Made Easier

Ready to tackle year-end processing with confidence? We’ve got guides for that.

Retirement Contributions

4. Check for Excess Retirement Contributions

Contributions 401(k), 403(b), or SIMPLE retirement plans cannot exceed IRS limits. The limits are as follows:
Type of Retirement Plan2022 Limits*2021 Limits
401(k) Elective Deferrals$20,500$19,500
403(b) Elective Deferrals$20,500$19,500
SIMPLE Employee Deferrals$14,000$13,500
Catch-Up Contribution for Employees 50 Years and Older$6,500$6,500

*These are projected limits and are subject to change.

Manual Checks

5. Process All Manual and Voided Checks

Record employee checks issued outside of the regular payroll process. Any tax liabilities associated with these checks also need to be paid by the required due dates. You can make this process easier by accounting for “manual checks” in your payroll system. It’s also a good idea to record any checks that have been void throughout the year.

Some payroll checks cut throughout the year may not have been cashed. These checks should not be voided in the payroll system but should be considered unclaimed property and reported to the appropriate state agency. The unclaimed property office may be a division of your state’s department of revenue or treasurer’s office.

To recap:

  • Account for manual checks written during 2021.
  • Confirm that all voided checks get recorded.
  • Report uncashed checks to the appropriate state agency as unclaimed property.
Manual Checks

6. Process Final Payroll for 2021

Check with your payroll provider to find out the last day you can submit your final 2021 payrolls to avoid penalties and interest charges. Review your W-2s to verify the following information before processing your final payroll of the year:

  • The spelling of employees’ names
  • Social security numbers
  • Addresses
  • Wages

Many businesses issue bonuses for company performance. If you are issuing bonuses and withholding retirement deductions, make sure the deduction doesn’t exceed the annual limit. It is also essential to process bonuses before the end of 2021. Processing ahead of time helps you avoid penalties and make tax payments on time.

If you have to process another payroll before the end of the year, you will have to review your company, employee, and contractor totals again.

ACA Reporting

Remember: Payroll taxes go off of the date wages get paid. For example, an employee works hours in 2021, but the next payday falls in 2022. Any earnings and deductions for the 2021 pay period get reflected in 2022.

Process Reports

7. Process 2021 Quarter-End and Year-End Reports

Close the quarter and file the Employer’s Quarterly Federal Tax Return (Form 941) by November 1, 2021, to report payroll taxes and employee wages. Form 941 is typically due by the last day of the month following the end of the quarter.

File Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return by January 31, 2022. However, you have an additional 10 calendar days to file if you deposited all the FUTA tax when due.

A company can be subject to penalties if you:

  • Fail to make the tax deposit on time or in the correct amounts
  • Made one or more of the deposits to an unauthorized financial institution
  • Paid your tax directly to the IRS
  • Paid the tax with your return
  • Didn’t make the deposits electronically
  • Record of Federal Tax Liability was incomplete or illegible
  • Liability amounts you reports didn’t equal the next taxes for the tax period

Wrap up the calendar year 2021 and prepare to process payroll in 2022. Print and mail W-2s and 1099-misc forms to employees and contractors.

  • Report employee income and withholdings to:
  • Employees,
  • Ex-employees who worked in the calendar year 2021, and
  • Government agencies using Form W-2.

Use 1099s to report the income paid to independent contractors and other payees.

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One Final Tip

Review and make sure labor law posters don’t need updating. State and federal governments mandate these posters to employers with more than one employee. Failure to update these based on legislative changes can result in additional compliance fees of $100-$10,000. Click here to check labor law compliance.

No matter your role in year-end processing, it’s best to stay up to date on tips and best practices to prepare better. You can bookmark this page and download our year-end payroll and HR guides to stay on top of any changes throughout the year.

We hope these tips will help you have the smoothest year-end payroll processing season yet.

How APS Can Help With Year-End Payroll Processing

APS is an award-winning unified payroll and HR platform. We are a 2021 Top HRIS and Payroll Services Vendor. Each year, thousands of payroll and HR managers trust APS as their source for year-end payroll, HR, tax, and ACA processing. For more information on how we can help you streamline your year-end and enter 2021 with confidence, click here.

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