Employment tax year-end planning essentials

2016 payroll year-end checklist

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It is time to consider all the tasks necessary to successfully close 2016 and open 2017, and our payroll year-end checklist is a great place to start.

As a result of the change in the federal Form W-2 filing due date to January 31, you will find numerous date changes in the year-end checklist relating to federal and state wage and tax statements. Be certain to carefully consider this year the potential for an increase in Forms W-2c since you will no longer have additional time to incorporate changes employees bring to your attention before filing them with many taxing authorities.

Ernst & Young LLP’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.

It is time to consider all the tasks necessary to successfully close 2015 and enter 2016.

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 information resources to support you in your year-end planning and compliance activities.

Here’s what you will find in our year-end publication

  • Ernst & Young LLP’s sample 2016 payroll year-end checklist
  • Ernst & Young LLP’s top 30 2016 payroll year-end checklist items
  • Table 1: 2017 federal holidays
  • Filing electronically for 2016
  • Table 2: Federal electronic filing due dates for 2016
  • Table 3: Special wage payments from A to Z — sample list
  • Table 4: State Form W-2 filing method requirements
  • Table 5: State unemployment insurance filing method requirements
  • Year-end employment tax reporting compliance

Here’s ten of EY’s top 30 2016 year-end checklist items

  1. 2016 Forms W-4 claiming exemption. Run a report of all employees claiming exemption from federal income tax withholding on Form W-4. If no 2016 Form W-4 is filed, withhold at single and zero exemptions beginning on February 17, 2016. (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 February 1, 2016). Check state and local Form W-4 requirements, and repeat the same steps for state and local income taxing authorities where applicable. See our special report for more information.
  2. Payroll system tax configuration review. Verify taxability configuration tables for all jurisdictions for 2016 and 2017.

    • Marriage equality. One significant change last year that affects many employees, and that may be retroactive, was the state and local taxability of same-gender spousal benefits. In the second of two landmark decisions on same-gender marriage, the U.S. Supreme Court ruled on June 26, 2015, that the 14th Amendment requires all states to license marriage between two people of the same gender and recognize same-gender marriages lawfully licensed and performed in another state. (Obergefell v. US, No. 14–556, June 26, 2015.)

    Some employers have yet to adequately adjust their state tax treatment of same-gender partner benefits to reflect last year’s changes. Now is a good time to confirm compliance.

    Read about the impact on state and local taxability of same-gender spousal and partner benefits here.

    • Transit benefits. Last year, Congress passed legislation that permanently gives parity to the monthly tax-free limit for transit passes and parking, with the tax-free limit for both set at $255 for 2016. Confirm that you properly incorporated this change for federal as well as state taxing jurisdictions that follow the Internal Revenue Code.

    Read more about the changes Congress made last year to transportation fringe benefits in our special report.

    • Wellness benefits. Confirm that you are giving the proper tax treatment to benefits provided under wellness plans. For our analysis of recent IRS guidance, go here.

    • Third-party sick pay. Your insurance provider is required to send you an annual statement of payments made and taxes withheld from disability pay in 2016 no later than January 17, 2017. You are likely required to file Forms W-2 with the SSA and provide copies to employees.

    For more information on third-party sick pay, read our special report here.

    • 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 $255 per month in 2016.

    For state details on the state treatment of fringe benefits for income tax and unemployment insurance, ask us about our TaxAbility™ research library.

    See more about our TaxAbility™ payroll tax configuration analytics here.

  3. 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 the timing for recognizing fringe benefits as paid for tax payment purposes in our special report.
  4. Incentive Stock Option (ISO) and Employee Stock Purchase Plan (ESPP) reporting. The exercise of an ISO in 2016 is required to be reported on Form 3921 and the transfer of shares under an ESPP in 2016 on Form 3922. Both forms are furnished to the employee by January 31, 2017, and filed with the IRS by February 28, 2017 (March 31, 2017, if filed electronically).
  5. Electronic filing requirements. Check federal, state and local electronic tax filing requirements for 2016 and 2017. Register or make an application to remit taxes and returns electronically if the threshold for 2016 is met. (See Table 2 for the IRS application deadlines, if applicable.) Also, check federal, state and local electronic tax payment requirements for 2017 and file any required applications to meet electronic filing and payment requirements in 2017. See Table 4 and Table 5 for the current state electronic filing requirements for income and unemployment insurance tax.
  6. 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.
  7. General ledger reconciliation and review. Perform general ledger reconciliations before releasing 2016 annual information statements and returns. See Table 3 for a sample list of compensatory items that might be found in a general ledger review.
  8. Payroll bank reconciliation. Perform payroll bank reconciliations through December 31, 2016, including identifying outstanding checks for 2016. Ask for an early cutoff statement if necessary.
  9. Form W-2 reporting of employer-provided group health benefits. Employers that filed 250 or more Forms W-2 in 2015 are required to report the aggregate cost of employer-provided group health benefits on the 2016 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.
  10. Affordable Care Act information reporting. Mandatory effective for tax year 2016, applicable large employers (ALE) are required to file Form 1095-C and transmittal Form 1094-C with the IRS. If you have 250 or more information returns during the calendar year, you must file them electronically. See the instructions for Forms 1095-C and 1094-C here.

    An applicable ALE is also required to give each full-time employee a copy of the Form 1095-C that is filed with the IRS. By January 31, 2017, statements must be furnished to employees on paper by mail or hand-delivered, unless the recipient affirmatively consents to receive the statement in an electronic format.

    Employers that are not ALEs but that sponsor self-insured group health plans must report information about employees (and their spouses and dependents) who enroll in the coverage even though they are not subject to the employer shared responsibility provisions of the ACA. Self-insured plan sponsors use Form 1095-B and transmittal Form 1094-B to meet these ACA information reporting requirements. See the instructions for Forms 1095-B and 1094-B here.

    ALE members that file 250 or more information returns must file them electronically through the ACA Information Returns (AIR) program.

    The IRS offers guidance about these ACA reporting requirements here.

    For guidelines on electronic filing of ACA returns, refer to Publication 5165, Guide for Electronically Filing Affordable Care Act (ACA) Information Returns.

    Read about ACA employer reporting challenges in our special report.


    EY - 2016 year-end checklist Read the complete top 30 tasks for year-end 2016. Download "EY’s 2016 payroll year-end checklist" as a printable document.