Employment tax year-end planning essentials
2014 payroll year-end checklist
It is that time of year to consider all of the tasks necessary to successfully close 2014 and enter into 2015.
Similar to last year, there are numerous changes to consider, including those pertaining to the taxation and reporting of fringe benefits and the requirements for filing state Forms W-2 and unemployment insurance returns electronically.
Ernst & Young LLP’s payroll year-end checklist explores these matters and more while providing you with these information resources to support you in your year-end planning and compliance activities:
- Ernst & Young LLP’s 2014 sample payroll year-end checklist
- 2015 federal holidays
- Filing electronically for 2014
- Federal electronic filing due dates for 2014
- Special wage payments from A to Z — sample list
- State Form W-2 filing method requirements
- State unemployment insurance filing method requirements
- Year-end employment tax reporting compliance
EY’s sample 2014 year-end checklist
Below is a sample year-end checklist of the top 30 year-end payroll and employment tax activities for 2014.
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.
Top 30 payroll year-end tasks for 2014
- Order Forms W-2 for 2014. 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: 15 December 2014)
- 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 2015. (Suggested deadline: 1 December 2014)
- 2014 Forms W-4 claiming exemption. Run a report of all employees claiming exemption from federal income tax withholding on Form W-4. If no 2015 Form W-4 is filed, withhold at single and zero exemptions beginning on 17 February 2015. (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 2 February 2015.)
Check state Form W-4 requirements, and repeat the same steps for state income taxing authorities where applicable. (Suggested deadline: 17 February 2015)
- Payroll system tax configuration review. Verify taxability configuration tables for all jurisdictions for 2014 and 2015. (Suggested deadlines: November 2014 – January 2015)
- Marriage equality. One significant change affecting many employees, and that may be retroactive, is the state and local taxability of same-gender spousal benefits. The 2013 US Supreme Court decision in Windsor that marriage includes a same-gender couple has resulted in a similar change in a number of states throughout 2014. As a result, same-gender partner benefits in these states may be tax-free for all of tax year 2014 depending on the facts and circumstances. Read more information concerning protective FICA refund claims pursuant to the decision in Windsor.
- Other fringe benefits. 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 monthly tax-free limit for transit benefits of $130 per month in 2014 and 2015.
- 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 deadlines: November –December 2014)
- General ledger reconciliation and review. Perform a general ledger reconciliation before releasing 2014 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 deadlines: November – December 2014)
- Payroll bank reconciliation. Perform payroll bank reconciliation through 31 December 2014, including identifying outstanding checks for 2014. Ask for an early cutoff statement if necessary. (Suggested deadlines: November – December 2014)
- Gross-up and tax advances. Perform all necessary gross-up calculations and impute all taxable amounts for 2014. Make tax advances when necessary (and when allowed by law) to remedy any withholding shortages resulting from imputed income. Remember that tax advances for 2014 must be repaid by employees no later than 1 April 2015. (Suggested deadline: 31 December 2014)
- Check your timing for posting taxable fringes to the payroll system. To prevent late deposit penalties and other adverse consequences, review the items on your year-end adjustment list to determine if they should have been posted to taxable wages on a periodic or other more frequent basis. Identify ways to mitigate exposures and adjust your procedures for the future accordingly. Read more about it on the Payroll Perspectives blog. (Suggested deadline: 31 December 2014)
- 2014 Form W-2 distribution. Determine what method will be used to distribute employee copies of the 2014 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.) (Suggested deadline: 15 January 2015)
- Incentive Stock Option (ISO) and Employee Stock Purchase Plan (ESPP) reporting. The exercise of an ISO in 2014 is required to be reported on Form 3921 and the transfer of shares under an ESPP in 2014 on Form 3922. Both forms are furnished to the employee by 2 February 2015, and filed with the IRS by 2 March 2015 (31 March, if filed electronically). (Suggested deadlines: 2 February 2015 – 31 March 2015)
- Electronic filing requirements. Check federal, state and local electronic tax filing requirements for 2014 and 2015. Register or make an application to remit taxes and returns electronically if the threshold for 2014 is met. (See Table 2 for the IRS application deadlines, if applicable.) Also, check federal, state and local electronic tax payment requirements for 2015 and file any required applications to meet electronic filing and payment requirements in 2015. See Table 4 and Table 5 for the current state filing electronic filing requirements for income and unemployment insurance tax. (Suggested deadlines: November – December 2014)
- Third-party employment tax 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: 15 January 2015)
- Form W-2, box 13 pension plan indicator. Coordinate with your benefits administrator to determine when Form W-2, box 13, “Pension Plan,” should be checked for each Form W-2 recipient. See page 28 of the 2014 General Instructions for Form W-2 and W-3. (Suggested deadline: 15 January 2015)
- Form W-2 reporting of employer-provided group health benefits. Employers that filed 250 or more Forms W-2 in 2013 are required to report the aggregate cost of employer-provided group health benefits on the 2014 Form W-2, box 12, code DD. Verify that the necessary information for each employee is available for Form W-2 reporting purposes. For further details, see the IRS website. (Suggested deadline: 15 January 2015)
- Check these new rules governing employer reimbursements for employee-purchased health insurance. Under the Affordable Care Act and effective in 2014, employers are subject to substantial penalties if they reimburse employees under certain situations for their purchase of individual health insurance policies. Read more about the new requirements. (Suggested deadline: December 2014)
- Review your independent contractors the same way a governmental auditor would. States are increasingly focused on whether employers have properly classified their workers as independent contractors, frequently asserting that they should be treated as employees. For more information about the standards that apply, read our special report. (Suggested deadline: 31 March 2015)
- Information reporting for US nonresident alien employees. If you paid wages to US nonresident alien employees in 2014 and they claimed an exemption from federal income tax withholding under a treaty exemption, you will be required to comply with the Form 1042-S reporting requirements. Both the recipient and IRS copies are due by 16 March 2015. For more information, see the IRS website. (Suggested deadline: 16 March 2015)
- 2014–15 employee notices. Run the reports necessary to comply with all federal and state employee notification requirements and consider others that may be helpful. (Suggested deadline: 2 February 2015, unless otherwise noted)
- The special accounting rule/no federal income tax withholding on personal-use auto — Employee notices should be provided by 2 February 2015, if the special accounting rule was used in 2014 or if you will elect not to withhold federal income tax from the value of personal use of company cars in 2015. Read more about special timing rules.
- Charitable contributions — You are required to provide employees with a report of the annual total of charitable contributions paid through payroll deduction. Consider using Form W-2, box 14, for this purpose.
- Earned Income Tax Credit (EITC) — For federal purposes, the Form W-2, Copy B includes the notice employers are required to provide employees concerning their eligibility for the Earned Income Tax Credit (EITC). Some states require a separate notification (other than Form W-2, Copy B) and may also impose a different annual deadline for making it available to employees. 30 January 2015, is EITC awareness day.
- Expiring Form W-4 — Notify employees who claimed exempt from federal income tax withholding in 2014 that they are required to furnish you with a 2015 Form W-4 by 16 February 2015. Verify state rules concerning withholding allowance certificates claiming exemption, and include state expiring information on the same employee notice.
- COBRA premium assistance — Former employees who received COBRA premium assistance payments in 2014 are required to report this information on their federal personal income tax return (Form 1040); therefore, 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 2014 federal tax returns. Remember, you report COBRA premium assistance credits on Form 941-X, and not Form 941.
- 2015 withholding tax changes — Notify employees of any change in the amount of tax they will pay in 2015 for Social Security, Medicare or federal, state and local income tax withholding.
- Additional Medicare tax reminder — Employees with wages in excess of $200,000 in 2014 should be reminded of their requirement to file with the IRS Form 8959, Additional Medicare Tax.
- Multi-state employees — For employees who worked in more than one state, you may want to consider providing employees a detail of the taxable wages that were paid within each work state. This is particularly relevant for New York employees because employers are required to report federal taxable wages (Form W-2, box 1) as state taxable wages (Form W-2, box 16).
- Federal unemployment insurance (FUTA) fourth quarter deposit adjustment. If you had employees working in the seven states and the Virgin Islands subject to the FUTA credit reduction in 2014, be certain to use the higher tax rates that apply in 2014 to compute the additional Form 940 tax due and make the payment no later than 2 February 2015. For more information on FUTA tax read our report here. (Suggested deadline 2 February 2015)
- 2014 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 18 for more information concerning year-end reconciliation procedures.) (Suggested deadlines: Various)
- Testing Form W-2 files before filing them. Effective for tax year 2014, the Social Security Administration (SSA) will return Forms W-2 files containing certain errors. For this reason, it is important that employers use SSA’s AccuWage before filing their returns. Employers using a third-party provider to handle Form W-2 files should require that the third-party provider give them a copy of the AccuWage acceptance report. Some states and locals require test files for first-time electronic filers. Be certain to comply with these requirements and consider submitting test files even if not required to do so. (Suggested deadline: 15 January 2015)
- 2015 payroll processing schedule. Prepare the 2015 payroll processing and tax return filing schedule. For a list of federal holidays, see Table 1. (Suggested deadline: December 2014)
- Review 2015 employer withholding tax guides. Review IRS Circular E, Publication 15, Employer’s Tax Guide, for 2015 and any similar state and local employer tax guides and withholding tables to determine taxability and reporting changes for 2015. Make all taxability, reporting and withholding rate changes for 2015 (including the 2015 exemption amounts for IRS tax levies). Test before your first live payroll in 2015. (Suggested deadline: 15 December 2014)
- 2015 tax rate and wage base updates. Input 2015 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 2015. State unemployment wage bases and rates should be verified in March 2015 prior to filing the first-quarter 2015 state unemployment tax returns (generally due by 30 April 2015).
For 2014 and 2015, the amount of federal unemployment insurance (FUTA) you pay may be higher because the states where your employees work may not have repaid their federal unemployment insurance loan balances. (Suggested deadline: 1 January 2015)
- Additional payroll period in 2014 or 2015. If you had an additional payroll period in 2014 or will have one in 2015 (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. Read more about the additional payroll period. (Suggested deadline: December 2014)
- 2015 payroll deductions. Input 2015 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 2014. Test to confirm accurate input of deduction information. (Suggested deadline: Prior to first payroll run for 2015)
- Purge 2014 expired records. Purge the employee master file of all employees terminated in 2014. (Suggested deadline: 31 December 2014)
- Returned Forms W-2. Instruct the mailroom on where to send returned Forms W-2 for 2014. (Suggested deadline: 9 January 2015)
- Duplicate Forms W-2. Make sure that all employee requests for duplicate 2014 Forms W-2 have been processed. (Suggested deadline: 10 April 2015)
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