Year-end payroll is a complex and multifaceted process, which is why we’ve created a comprehensive year-end payroll checklist to help you tackle all of the major tax- and compliance-related tasks that are required for the season. Along the way, you’ll likely have questions about required tax forms, deadlines, and more specialized concerns like fringe benefits, special payments to employees, expense reimbursements, and more. In this article, we’ll explore some easy-to-forget year-end payroll tasks that you should keep in mind as you finalize your year-end payroll taxes and prepare for the new year ahead.
Payroll-Specific Tasks: W-2s and 1099s
Whether you already work with a qualified payroll provider or currently manage payroll internally, there are a number of special payments to employees that should be accounted for and calculated in wages/earnings.
- Non-cash and cash gifts should be added to an employee’s wages. This does not include “occasional” or De Minimis gifts, but does include things like gift certificates, gift cards, and season tickets to sporting or entertainment events.
- Nontaxable relocation expenses (paid by you to your employee and not to third-parties) should be reported in Box 12 of the W-2 form.
- Group-term life insurance coverage is subject to FICA taxes if the amount exceeds $50,000. In this case, the amount should be reported on the W-2 in Box 12.
- Company car use (personal) should be added to an employee’s wages. In this case, you will need to provide the total miles driven for personal use or calculate a percentage of personal use. If you intend to claim 100% of the car use in wages, use the IRS annual lease value method.
- Other fringe benefits may be subject to state taxes, FUTA, FICA, and federal income tax, depending on special reporting requirements specific to your state and industry.
When it comes to 1099s, you are required to report all payments to nonemployees equal to or exceeding $600. Additionally, if more than 50% of your workforce falls under 1099 classification, you must collect and pay paid family medical leave (PFML) for this portion of your workforce. Remember that PMFL also applies to all W-2 employees and all new employees should be provided with state paperwork that dictates whether they will pay the tax or if the employer will cover their contribution.
Additional Considerations and Payroll Tasks
To ensure ongoing legal compliance, stay attuned to any forthcoming local, state, or federal policy changes that will alter minimum wage rates or employee classification/salary thresholds (for nonexempt and exempt employees) in the coming year. It’s important to prepare for these changes to avoid legal penalties or miscalculations in the first pay period of the new year.
The 401(k) maximum will shift to $22,500 in 2023. If your business offers a 401(k) plan as an employee benefit, be sure to notify your payroll provider of any changes to employer or employee contributions in the new year. Similarly, any changes to health insurance deductions, withholdings, or pay rates should be communicated to your payroll provider, or you should prepare for these adjustments internally.
It's also important to be mindful of tax requirements based on business structure. As just one example, if you are a Sub-S corporation that pays health insurance through a business policy (shareholder health insurance), you must calculate the gross amount of annual health insurance paid for any shareholder with 2% or greater shares in your business. In general, different business types are subject to a unique set of local, state, federal, and industry-specific business tax requirements that could impact their obligations to pay income, employer, self-employment, estimated, and excise taxes.
If you plan to take advantage of the opportunity to offer tax-deductible year-end bonuses to your employees, remember that a pay bonus given in 2022 is deductible in 2022 for cash-basis businesses while accrual-basis businesses have more “breathing room” and can claim bonuses for 2022 even if the payment occurs up to 75 days after the end of the year (by mid-March 2023). Business structure also impacts bonus deduction guidelines for S- and C-corporations, making qualifications for tax-deductible bonuses slightly more complicated. Consult your payroll provider for more information about year-end bonus options based on your business structure.
Optimize Year-End Payroll with Payday
With so many dimensions to year-end payroll, it’s helpful to have experts in your corner. Payday helps you simplify the process and sustain best practices throughout the new year, providing a comprehensive payroll solution that integrates with HR, timekeeping, benefits administration, and more. Ready to streamline payroll, improve employee satisfaction, and make onboarding hassle-free in 2023? Contact us today to start our collaboration.