Year End Payroll Tasks Brief

A reminder of the following payroll reporting tasks that come with the end of the year:

Regular quarter end filings are due by Jan 31 for SUTA, UHI, Mass Wage reporting and quarterly Mass PR deposits.

In addition, FUTA is due by Jan 31 with Form 940 or 940 EZ. MYOB and QB generate 940 reports or forms. Check out the Form 940 instructions. Although it looks bad, you really end up paying 0.08% of the first $7000 of wages for each employee, or $56 per employee per year.

1099 forms go to vendors by Jan 31; to the IRS by Feb 28.
**Now is the time for all of us to start our clients grooming their 1099 information!
**Don't forget that rent goes on 1099s if paid to non corporate lessors. Even incorporated lawyers get 1099s...
**Don't forget that JS+A does NOT get a 1099. We are a corporation!

W2 forms go to employees by Jan 31; to the SSA by Feb 28

Note year-end adjustments to W2s: If clients are shareholders of an S Corp of which they own more than 2%, then their W2 needs to be modified to include in Wages the value of ALL fringe benefits - even those normally tax exempt to employees, like health and life insurance. The most common: health insurance. The premiums paid for the shareholder-employee go in box 1 of the W2 (Federal Wages) and in the state wages box. These benefits are NOT subject to FICA tax, so they do not go in the Social Security Wages or Medicare Wages boxes. Payroll services won't understand this; be prepared to explain carefully.

Any employee who receives taxable fringe benefits or non-cash income needs these included on his or her W2 as well. Most common examples: value of personal use of company car or payment of wages in stock. These are BOTH FICA and regular tax income.

Payroll services can include this information on W2s for us but typically need to be told about it by the end of December or the middle of January. Fox Payroll is more flexible, of course...

The IRS gives taxpayers several methods to choose from in valuing a car benefit. These are described in IRS Publication 15B. They are really not that hard to figure out. If you used a method last year, use that same method this year. Go over the methods anyway to familiarize yourself with them.

In any case, taxable fringe benefits ARE ordinarily subject to Fed, State and FICA withholding just like other pay. This can make the paycheck on which they are reported shrink quite a bit! One way around this is to tell the payroll service to supress Fed and State withholding on the fringes. This is what we should do. They cannot suppress FICA withholding when it applies.

Sometimes employers wish to cover the tax increase caused their employees by the non cash benefits. Such an amount offered by them is itself additional wages. Makes sense, right? Imagine an employee, Sue, whose take home pay is usually $900 per pay check on gross wages of $1200. If we put $2000 of non cash benefits on Sue's paycheck, her take home will go down by, say, $600. This will hurt Sue. So Sue's boss may ask us to increase Sue's CASH wages for that pay period so her take home pay is STILL $900. You can do the algebra to figure this out, or you can play with MYOB or QB till it comes out right. Or you can call the client's payroll service and have them help you figure it out. The boss needs to understand that the additional wages to Sue are coming out of the boss's bank account! In other words, it's a real bonus, not a paper one... We call this "grossing up the benefit to cover FICA".

SIMPLE IRA withholdings from employees have to get to the plan trustee by Jan 31.
**This is easy to forget since contributions to other types of plans are due later!

This is especially important where sole proprietors or partners are making SIMPLE contributions. The employer match is due by the due date of the employer's return, including extensions.

It is too late to set up a SIMPLE for after Oct 1. You can still set up a SEP till the due date of the return to set up a SEP. You can set up a Keogh plan any time before Dec 31. You have to have the plan in place and the account open, though you need not actually put money into it till the next year. You can set up a Roth or regular IRA by April 15 of the following year - eg, Apr 15 2008 for 2007 returns.

If a client has a 401(k) at one job and another 401(k) or SIMPLE at another, the total amount put into all these deferral plans cannot exceed an annual limit - $15,500 for 2007. If a client has maxed out a 401(k) she cannot put money into a SIMPLE.

Similar rules but different limits for a 457 which is a 401K for government employees. Ie, if you have both a 401(k) and a 457 you have to add the amounts deferred into both plans to see if you have deferred too much.

Actually, you CAN put extra money into a SIMPLE or 401(k) - but then the amount contributed in excess will be included in the plan participant's gross income. That is, if it was deducted from their W2 income it will need to be added back. If the employer knows about the excess in time, the employer can adjust Form W2 accordingly. If the employer does NOT know about the excess deferral in time, the employee adjusts Line 7 of Form 1040 to report the excess as Wages income - in this case, the amount on Form 1040 for Wages will not match Forms W2. The employee would attach an explanation to the return. And the participant needs to have the excess - and income it may have earned - taken out by early the next year.

Details follow:

If the total of an employee's deferrals is more than the limit for the year, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. He or she must notify the plan by March 1 of the next year, of the amount to be paid from each plan. The plan must then pay the employee that amount by April 15 of that year.

Excess withdrawn by April 15.
If the employee takes out the excess deferral by April 15, it is not reported again by including it in the employee's gross income for the prior year. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10% tax on early distributions.

If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income.

Even if the employee takes out the excess deferral by April 15, the amount is considered contributed for satisfying (or not satisfying) the nondiscrimination requirements of the plan.

Excess not withdrawn by April 15.
If the employee does not take out the excess deferral by April 15, the excess, though taxable in 2001, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

If the employee takes out the excess deferral AFTER April 15, the excess is taxable in BOTH the year of the over-contribution AND the year it was withdrawn. This sucks and should be avoided if possible. There are more details in IRS Pub 525.

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