Year-end technically begins after the close of the last payroll in December, while the new year begins with the first payroll in January. But preparation for year-end doesn’t have to wait until then. In fact, it should begin months earlier to ensure a smooth processing season.
Most of the tasks that have to be completed for year-end or the new year must be performed between late December and the end of January. One of the easiest ways to prepare is also the most simple. By creating and utilizing checklists and spreadsheets, payroll can map out its year-end strategy. Some payroll departments start as early as November while many now make year-end preparation part of their year-round schedule.
What type of spreadsheet or checklist should be used? The details have to be personalized for each payroll department. Overall, the spreadsheets fall into three categories: year-end, year-beginning, and Form W-2.
The year-end checklist will help ensure that all tasks to help finish off the year have been completed. Depending on the department’s responsibilities, a typical year-end checklist includes:
Create a schedule of all tasks that need to be completed with beginning and ending dates. This will be your year-end log. Assign all tasks as soon as possible, including who will be in charge of the log.
Set up a system for collecting employee address changes before the end of the year but after the last payroll is run. This could include an intranet, fax number, e-mail, or dedicated phone line. This will help ensure that Forms W-2 go to the right address. Be sure to update all addresses in the payroll system as they are received until the system is closed out for the year.
Set up a year-end committee to make sure that all items on your log are covered. This can be an ad hoc or one-time-only committee just for year-end. Many payroll departments are now running this committee year round to avoid the year-end crunch time. You need anyone who is involved to be included such as AP, HR, and IT. Think outside the box here. For example, who handles company vehicles? You need that information at year-end so this might require a representative on the committee.
This committee will get your year-end log and be informed of the processing calendar and the items needed by each department to comply with all year-end requirements. This is when all tasks that cannot be accomplished by payroll must be assigned to the appropriate department. This committee does not need to meet often. In fact, one time only to organize can work out well if good e-mail communication and a constantly updated year-end log are used and distributed as assignments are completed or new items are added.
Make a list or update last year’s list of all fringe benefits offered by the company that are not paid through the payroll department but are or could be taxable or reportable on Form W-2. Once the spreadsheet of the items is complete, request the information from the appropriate department. Track the progress of the spreadsheet to make sure the information will be received in time for year-end processing.
Payment items that could be included on the spreadsheet are:
- Business expense reimbursements, including mileage.
- Educational assistance. Payments are made directly to the employee to reimburse for a class already completed or are made to the college or university for an upcoming class.
- Auto allowance. The employee is given a flat dollar amount per month or other time frame for the business use of a personal vehicle.
- Relocation or moving expenses. The employee either has had payments made to a third party on his or her behalf or been reimbursed directly for out-of-pocket expenses.
- Club dues. The employee may have golf, country club, or health club dues paid directly on his or her behalf or be reimbursed for the dues.
- Medical expenses. The employee may have out-of-pocket medical expenses reimbursed, including annual physicals.
- Dependent care. The employee’s dependent care may be paid directly to the provider or the employee is reimbursed for out-of-pocket expenses.
- Employee referral awards. Employees are given cash payments for referring other employees.
- Suggestion awards. Employees are given cash payments for making suggestions to the company that are implemented.
Benefits to include on the spreadsheet:
- Personal use of a company vehicle. The employee may be given a company- owned vehicle to use 24/7. Though it is for business use only, if the employee commutes in the car there is still personal use.
- Dependent care. Dependent care may be provided as a benefit in kind on the premises or paid to a third party provider as a bulk payment instead of by individual.
- Health club memberships. The company may provide health club memberships to all employees for which the payment is made in bulk, not individually.
- Meals. The employer may provide onsite meals to employees or pay in bulk at a local restaurant.
- Length-of-service and safety awards. These awards may be given to employees to promote retention or safety.
- Free use of the company service. Employees may receive the same services provided to customers. For example: Employees receive free cable if the company is a cable service provider.
- Cell phones. The company may give the employee a cell phone to use for business and allow personal use.
- Newspapers or magazine subscriptions.
- Christmas or other holiday gift certificates.
- Employee recognition awards. The employee is given rewards for being voted employee of the month, quarter, or year. The rewards may be trips, tangible property, or cash.
Not all of these items may be taxable or reportable, but they should be tracked to make certain they are not. Some of the items may become taxable and reportable after certain dollar limits have been reached. The year-end committee should delegate collecting this information to the proper departments, such as AP or HR.
Payroll’s tasks are to compile the list of the items, assign collecting of the data to the proper department, and make sure the raw data is received back in time to be processed by the final payroll for the year to allow for taxation.
Do all necessary calculations to determine taxable wages for fringe benefits that need to be input to the payroll system for taxation or reporting, once the raw data on fringe benefits is received. The most common type of fringe benefit is personal use of a company vehicle. You may need to collect mileage logs and odometer readings to begin your calculations.
Verify pension plan requirements for all employees. If you have a retirement plan—including a 401(k) or 403(b)—the retirement plan box on Form W-2 must be marked for all employees as required by the IRS. Depending on what types of plans your company offers, the box could be marked differently for each employee. Payroll needs to verify if it has a retirement plan, the type of plan, and the requirements for marking the box prior to year-end. Rules for making the determination on marking the box are included in the instructions for the Form W-2.
Create a year-end processing and printing schedule for MIS or confirm the schedule with your outside payroll vendor.
Create a checklist for all tax forms that will be received or needed for year-end—if you don’t already have one. This includes all federal and state quarterly and annual returns, magnetic media, electronic filing forms, etc.
Order Forms W-2 if needed by your payroll system.
Verify that all manual checks or voids (especially reversals) have been processed correctly.
Deactivate all Forms W-5 for this year.
Close out all manual check files and logs, timesheet files, and spreadsheet files for current year (tax files, garnishment files, etc.).
Locate and close out all files to prepare for Form W-2 reconciliation and processing. This includes the computer files. Processing year-end should not be held up because someone is out sick and a file is on their computer.
It is sometimes hard to remember, but year-end is also the start of a new year and tasks must be completed. Here is the basic checklist for starting the year off right:
Set up the new year’s payroll processing calendar.
Set up new submission calendar for payroll. This informs employees when items, such as Form W-4, must be to payroll to be processed.
Verify that all new wage bases for taxes are in place before running the first payroll of the year. This needs to be done even if you use an outside service.
Verify that all changes have been made to tax tables and benefits tables, such as insurance premiums.
Verify all wage bases and deductions after the first payroll is run. Pull test employees to make sure taxes are calculating correctly, that garnishments are functioning correctly, and that all benefits are being deducted properly.
Verify that all SUI rates for the new year are in the system to ensure that tax liabilities are calculated correctly from the first payroll of the year.
Make sure that the current year’s Forms W-4 and W-5 are available for all employees.
Get the payroll department ready for the new year:
- Download or order new forms. When ordering new Forms W-4 don’t forget the state equivalents.
- Download or order new publications and state tax books.
- Set up tax files and manual check logs for the new year.
- Distribute new mileage logs for the new year if you have personal use of a company vehicle. Take odometer readings if needed.
- Order new reference guides or books.
- Update all infrastructures. This includes department Web sites and bulletin boards (computer and physical) to cover the new year’s information, including wage bases, payroll processing calendars, and pay dates.
- Create new spreadsheets, timesheet files, and report binders or CD holders.
- Make sure that all payroll procedures are updated for any changes in the new year.
- In February, make sure that all expired Form W-4’s are reset at S-0 if the new form has not been received.
To have a successful year-end, it is crucial to make sure that everything is balanced, reconciled, and completed before processing the Forms W-2. Having to do more than one W-2 run because of missing or out-of-balance situations is costly and time consuming.
The following sample checklist might help you in making sure all items are taken care of before calling for the W-2 run:
Determine the individual requirements for the retirement plan box in our previous checklist. You may need to physically verify if the box is marked correctly for each employee. Consult with your payroll vendor or systems person to determine how this is handled.
Reconcile Form W-2 to Form 941 for fourth quarter. In fact, it is preferred that Form W-2 wages be reconciled on a quarterly basis. Doing so helps uncover any errors that can then be corrected prior to the year-end. If this has not been done throughout the year, all four quarters will have to be verified at this time.
Reconcile Form W-2 wages, etc. with all states for the fourth quarter. Again, reconcile wages quarterly rather than all at once at year-end. If you have not reconciled for the rest of the year, do so now and set up a system for the new year to perform both this task and the reconciliation to the quarterly Form 941.
Reconcile Form W-2 to itself. Have any limits been exceeded? Do state and federal wages reconcile? Are all benefits being recorded in box 12 correctly? Are dependent care benefits recorded in box 10? Are state wages being recorded in the correct boxes?
Verify all names and Social Security numbers against the Social Security Administration’s database to prevent mismatches, avoid no-match letters, and reduce the chances of penalties and audits.
Regarding Form W-2, the best practice is to move this task from year-end to when you are processing a new hire. Payroll departments should verify the employee’s name and SSN upon hire and before the first paycheck is issued. With the new verification service through the SSA’s Web site, all payroll departments can now verify each employee’s name and SSN against actual records. This service is offered through the agency’s Business Services Online feature and is free to all employers.
Year-end is just around the corner. Preparing for this period doesn’t have to wait until then. In fact, it can and should begin months earlier to ensure a smooth and uneventful processing season. Start now.
This article was originally published in IOMA’s monthly newsletter, ‘Payroll Practitioner’s Monthly’ and is republished here with the express written permission of IOMA, Copyright(c) 2011. For more information, visit www.ioma.com or for copyright permissions please call 212-576-8747 or email firstname.lastname@example.org.