Four Things You Can Do in December for Simpler Payroll Tax Filing in January
The year is tiptoeing to an end, and smart employers know that December—that holiday-filled, fudge-fueled month before the looming deadlines—is the best time to get payroll records in order for tax filing. The timing could hardly be worse. But there are things you can do now to put the books to bed early—and still leave room for enjoying the holidays.
To get ahead of the January rush, pay particular attention to payroll file updates, vehicle fringe benefits, reportable insurance premiums, and vendor reporting forms. Managing these four areas now will help ensure a smoother, simpler tax filing process in the new year.
Put the finish on your files: a quick quiz for year-end readiness
The first thing you should do is review your payroll files for completeness. If you can answer “yes” to the following questions, you’re in good shape. If you answer “no,” then it’s time for some data entry:
- Are all void and manual checks input into the system for proper recording of wages and withholdings?
- Have all third-party sick pay notices been entered into the system?
- Have any employees made changes to their personal information that need to be updated, such as name, marital status, or deductions?
- Are there non-cash fringe benefits such as auto gross-up, insurance, health savings accounts (HSAs), or cafeteria programs that need to be added to the wage information?
Calculate automobile gross-up for W-2 reporting early
If you provide company vehicles to your employees, you are required to add this taxable fringe benefit to those employees’ W-2 wages. To do this, you must gross up the employee’s total salary to include the value of the car perk.
To compute the taxable benefit amount, you need to know the vehicle’s value, model year, total mileage, and the breakdown of mileage by “business” and “personal”. (Take note: miles for commuting are considered personal.) If you have purchased or leased a new vehicle, the computation needs to be prorated for the number of months it was used with a percentage of the car value. The car’s value will based upon that time percentage. From this information, you can arrive at your taxable dollar number by using an auto gross-up calculation form. This example shows how to figure the reportable benefit amount.
Good news: the IRS allows for an optional annual cutoff of October 31 (rather than the usual December 31 date) for extra time to compute this figure. Save yourself the later headache and add this information to W-2 wages now.
Taxable or not? Know which insurance benefits are reportable
In some instances, the IRS considers insurance a taxable fringe benefit rather than a non-taxable employee benefit. Determining the difference now will save you hassle at tax time. Here are a few common benefit scenarios and their tax implications to help you make the call:
- Life insurance: If your company pays policy premiums where the shareholder, officer, or a member of their family is the beneficiary of the policy, they are subject to tax, and you are required report them on the individual’s W-2.
- Health and disability insurance: You must report the annual cost of company-paid health and disability insurance premiums for the following individuals: 2 percent shareholders of S corporations, partners of partnerships, and members of limited liability corporations (LLCs).
- Group term insurance: The IRS allows for the first $50,000 of an employee’s group life insurance coverage to be tax-free. The taxable income added to the employee’s W-2 is calculated according to the employee’s age, based on the IRS’s premium table. If your company pays the premium for group term life insurance coverage over $2,000 on any owner or employee’s dependent, it must be reported on the W-2.
Don’t forget your vendors: considerations for 1099s
Forms 1099 will be due in early February. The vendors you paid $600 or more for services or rent and who are individuals, partnerships, or single-member LLCs must be issued a 1099 form. (Corporations don’t have to be issued a 1099 unless payments were for legal fees.)
Be sure to request the correct legal entity or individual name, address, and employer identification number (EIN) for vendors up front. The vendor’s name on the 1099 must agree with their federal EIN or the social security number. As a best practice, you should have anyone you hire to perform a service complete a W-9 before issuing them a check. (You can download a blank W-9 form here.)
How we can help
As you ready your books for year-end reporting, make it a point to contact your payroll service to coordinate timing deadlines and their associated tasks. We can help you process, calculate, and file your payroll reports, as well as prepare tax returns.
Opal Meyer, an outsourcing engagement director with LarsonAllen, notes that advance planning makes filing much easier on you and your staff. She says, “Take care of whatever you can in early December—and then enjoy the holidays free from the dread of what comes after them.”
Opal Meyer, Outsourcing, Engagement Director
omeyer@larsonallen.com or 314-925-4383
Janice Small, Outsourcing, Engagement Director
jsmall@larsonallen.com or 847-597-1825
View our tax principals and outsourced accounting principals.