Employment tax year-end planning essentials

2013 payroll year-end checklist

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Employment tax and payroll professionals are deep into payroll tax busy season, and now is a good time to finalize checklists and production schedules.

In addition to the routine steps involved in closing the year are a host of challenges unique to 2013. For instance, retroactive tax legislation and rulings occurring throughout 2013 will require special consideration of federal, state and local adjustments in employment tax and withholding calculations that may be required before 31 December, as well as corrective returns for prior quarters and tax years.

Employees who were subject to higher federal taxes this year due to the additional Medicare tax or the increase in federal income tax may have numerous questions about their 2013 Forms W-2, in particular if they face unexpected tax liabilities when filing their income tax returns.

  • For more details concerning the implementation of the additional Medicare tax, click here.
  • For information about how 2013 federal tax changes may affect your employees this year, click here.

Similar to last year, federal unemployment insurance (FUTA) reporting will be complicated by the sizable number of states that continue to be subject to the FUTA credit reduction.

With so many states pushing to eliminate paper, there are many changes in the acceptable methods for filing Forms W-2 and unemployment insurance returns.

EY’s payroll year-end checklist explores these matters and more while providing you with information resources to support you in your year-end planning and compliance activities.

Creating your year-end checklist

We have created a sample year-end checklist of the top 25 year-end payroll and employment tax activities for 2013. A column is included for inserting your own target completion date.

Keep in mind that this is not a comprehensive list. Each business is unique in its payroll processes. Make a careful inventory of your own requirements and augment this checklist as necessary.

EY’s sample 2013 payroll year-end checklist

  1. Electronic filing requirements. Check federal, state and local electronic tax filing requirements for 2013 and 2014. Register or make an application to remit taxes and returns electronically if the threshold for 2013 is met. (See Table 2 for the IRS application deadlines, if applicable.) Also, check federal, state and local electronic tax payment requirements for 2014 and file any required applications to meet electronic filing and payment requirements in 2014. See Table 4 and 5 for the current state filing electronic filing requirements for income and unemployment insurance tax. (Suggested deadline: Nov–Dec 2013)
  2. Test files. Run test files of the 2013 federal, state and local Forms W-2. Verify compliance with format and reporting requirements. (Suggested deadline: Nov–Dec 2013)
  3. Form W-4 verification. Ask that employees review their name, address, Social Security number and Form W-4 information to maintain accuracy on Form W-2, and check that federal and state income tax withholding elections are correct for 2014. (Suggested deadline: Nov–Dec 2013)
  4. Order Forms W-2 for 2013. If purchasing Forms W-2 from a forms supplier, order and inspect the incoming stock. For software packages used in preparing Forms W-2, request the dated approval notice that the software provider obtained from the Social Security Administration (SSA). (Suggested deadline: Dec 2013)
  5. 2014 payroll processing schedule. Prepare the 2014 payroll processing and tax return filing schedule. For a list of federal holidays, see Table 1. (Suggested deadline: Dec 2013)
  6. 2013 Form W-2 distribution. Determine what method will be used to distribute employee copies of the 2013 Forms W-2. If special mailing rates will be used, be certain to file all necessary documents with the U.S. Postal Service. (See T.D. 9114, 69 FR 7567, 2-18-00, for information on providing Forms W-2 to employees electronically.) Note that the postal rates are scheduled to increase effective 26 January 2014. (Suggested deadline: Dec 2013)
  7. Additional payroll period in 2013 or 2014. If you had an additional payroll period in 2013 (i.e., 27 rather than 26, or 53 rather than 52), you may need to make adjustments to your federal income tax withholding. Confirm that there were no errors in making payroll deductions because of the additional payroll period, particularly regarding pretax deductions. Similarly, if you expect to have an additional payroll period in 2014, make appropriate adjustments to income tax withholding calculations and payroll deductions. (Suggested deadline: Dec 2013)
  8. 2013 tax payment reconciliation. Prepare all fourth-quarter tax reconciliation(s) prior to making the final tax payment(s) to jurisdictions for the quarter or year. See page 19 for more information concerning year-end reconciliation procedures. (Suggested deadline: Various)
  9. Payroll system tax configuration review. Verify taxability configuration tables for all jurisdictions for 2013 and 2014. One significant change affecting most employers effective in 2013, and that may be retroactive, is the federal taxability of same-sex spousal benefits. For more information, see our special report, Same-sex partner benefits in the wake of the Windsor. (Suggested deadline: Dec 2013)

    Note that a few states are not “coupled” with the federal Internal Revenue Code for specific fringe benefits. For instance, a number of states do not mirror the IRS tax treatment of same-sex spousal and partner benefits.

    Other differences also apply.

    Example 1: Effective 1 January 2013, qualified educational assistance up to $5,250 per year is excluded from federal taxable income under IRC §127 but is included in Minnesota state taxable income. (For more details, go to the Minnesota Department of Revenue’s website here.)

    Example 2: A number of states do not follow the 2013 federal monthly limit for transportation fringe benefits. Other similar exceptions apply.
  10. Third-party service provider verification. Work with your third-party employment tax provider to make sure that returns and information statements will be filed for all applicable jurisdictions and that the third party has reporting agent approval when necessary to file on your behalf. (Suggested deadline: 1 Dec 2013)
  11. Accounts payable review. Review accounts payable and general ledger records for unreported taxable items. See Table 3 for a sample list of compensatory items that might have been paid through accounts payable. (Suggested deadline: 1 and 31 Dec 2013)
  12. Payroll bank reconciliation. Perform payroll bank reconciliation through 31 December 2013, including identifying outstanding checks for 2013. Ask for an early cutoff statement if necessary. (Suggested deadlines: 30 Nov 2013, 31 Dec 2013, 15 Jan 2014)
  13. General ledger reconciliation and review. Perform a general ledger reconciliation before releasing 2013 annual information statements and returns. See Table 3 for a sample list of compensatory items that might be found in a general ledger review. (Suggested deadline: 30 Nov 2013, 31 Dec 2013)
  14. Gross-up and tax advances. Perform all necessary gross-up calculations and impute all taxable amounts for 2013. Make tax advances when necessary (and when allowed by law) to remedy any withholding shortages resulting from imputed income. Remember that tax advances for 2013 must be repaid by employees no later than April 1, 2014. (Suggested deadline: 31 Dec 2013, 1 Apr 2014)
  15. Review 2014 employer withholding tax guides. Review IRS Circular E, Publication 15, Employer’s Tax Guide, for 2014 and any similar state and local employer tax guides and withholding tables to determine taxability and reporting changes for 2014. Make all taxability, reporting and withholding rate changes for 2014 (including the 2014 exemption amounts for IRS tax levies). Test before your first live payroll in 2014. For a preliminary list of 2014 rates and limits, see our handy reference guide. (Suggested deadline: 15 Dec 2013)
  16. 2012–13 retroactive adjustments for transit and same-sex spousal benefits. Fiscal cliff legislation enacted over the 2013 New Year’s holiday weekend retroactively increased the monthly tax-free amount for commuter highway vehicles/ transit passes by giving them parity with parking benefits (effective 1 January 2012). As a result of this change, employers were required to issue Forms W-2c to affected employees for 2012 and to make adjustments for any affected periods in 2013. Employers that may have missed this requirement will want to include the corrections in their year-end planning. (Suggested deadline: 31 Dec 2013)

    See our special report for more information about the employer impact of the fiscal cliff legislation.

    Subsequent to the Supreme Court’s decision in Windsor, the Treasury and IRS issued guidelines effective 16 September 2013, providing that the federal definition of marriage extends to a same-sex couple who was lawfully married in the state or country of celebration. Pursuant to same-sex spousal benefits that are now excluded from federal taxable wages, employers may claim FICA refunds for all open tax years (generally, 2010 through 2012). Employers that have not yet corrected the tax setup for same-sex spousal benefits will want to include this step in their year-end activities.

    For more information, see our report, Same-sex partner benefits in the wake of Windsor.
  17. 2014 tax rate and wage base updates. Input 2014 Social Security, state unemployment, state disability and other similar taxable wage base and tax rate information. If using a third-party provider, test the third party’s system requirements before the first live payroll in 2014. State unemployment wage bases and rates should be verified in March 2014 prior to filing the first-quarter 2014 state unemployment tax returns (generally due by April 30, 2014).

    For 2013 and 2014, the amount of federal unemployment insurance (FUTA) you pay may be higher because the states where your employees work may not have repaid their FUTA loan balances.

    For the 2013 FUTA credit reduction states and a preliminary list of 2013 rates and limits, see our handy reference guide. (Suggested deadline: 1 Jan 2014)
  18. 2013 Forms W-4 claiming exempt. Run a report of all employees claiming exemption from federal income tax withholding on Form W-4. If no 2014 Form W-4 is filed, withhold at single and zero exemptions beginning on 17 February 2014. (Many employers send notifications to employees when they are required to file a new Form W-4. Such notices should be sent to employees no later than 31 December.)

    Check state Form W-4 and Earned Income Credit requirements, and repeat the same steps for state income taxing authorities where applicable. (Suggested deadlines: 31 Dec 2013 for final verification of affected employees, 17 Feb 2014 to adjust withholding to single and zero)
  19. Registering to file with SSA or IRS. If filing Forms W-2 electronically with the SSA for the first time, you will need to register through the SSA’s Business Services Online (BSO) website. If you are required to file Forms 1099, 1042-S or 8027 electronically for the first time for tax year 2013, submit Form 4419 to IRS to obtain your Transmitter Control Code (TCC), which is required in all electronic files submitted to IRS. You should also submit a test file to the IRS. (Suggested deadline: See Table 2 for more details)
  20. Reporting cost of employer-provided group health benefits. Employers that filed more than 250 Forms W-2 in 2012 are required to report the aggregate cost of employer-provided group health benefits on Form W-2, box 12, code DD. For further details, see our special report. (Suggested deadline: Dec 2013)
  21. 2013–14 employee notices. Run the reports necessary to comply with all federal employee notification requirements. (Suggested deadline: 24 Jan 2014)

    For instance:
    1. The special accounting rule/no federal income tax withholding on personal-use auto — Employee notices should be provided by 31 January 2014, if the special accounting rule was used in 2013 or if you will elect not to withhold federal income tax from the value of personal use of company cars in 2014.
    2. Charitable contributions — You are required to provide employees with a report of the annual total of charitable contributions paid through payroll deduction.
    3. COBRA premium assistance — Former employees who received COBRA premium assistance payments in 2013 are required to report this information on their federal personal income tax return (Form 1040). While not required to do so, giving them an annual summary of their total COBRA liability, the amount they paid and the portion representing the subsidy (65% of the liability) will reduce the number of inquiries you are likely to receive from these individuals as they prepare their 2013 federal tax returns.
    4. 2014 federal withholding changes — Notify employees of any change in the 2014 withholding rates for Social Security, Medicare or federal income tax withholding. Some of the 2014 rates and limits they will want to know about are available here.
    5. Remind employees about the 2013 federal tax changes — Employees should be reminded about the additional Medicare tax that took effect this year and their requirement to new Form 8959, Additional Medicare Tax. Employees also may have questions about their federal income tax withholding as a result of 2013 changes in some income tax rates. For a summary you can share with your employees, click here.
  22. 2014 payroll deductions. Input 2014 payroll deduction information pursuant to fringe benefits or other deductions that are subject to annual revision. Stop all payroll deductions that were authorized only through 2013. Test to confirm accurate input of deduction information. (Suggested deadline: Prior to first payroll run for 2014)
  23. Purge 2013 expired records. Purge the employee master file of all employees terminated in 2013. (Suggested deadline: 31 Dec 2013)
  24. Returned Forms W-2. Instruct the mailroom on where to send returned Forms W-2 for 2013. (Suggested deadline: 10 Jan 2014)
  25. Duplicate Forms W-2. Make sure that all employee requests for duplicate 2013 Forms W-2 have been processed. (Suggested deadline: 11 Apr 2014)
EY’s 2013 payroll year-end checklist Download "EY’s 2013 payroll year-end checklist" as a printable document.