December Income – 2020 Is Your Year!

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Which Tax Year Should End-of-Year Employee Paychecks Be In?

You pay employees on January 4, 2020, for work done in the last week of December 2020 because that’s your normal payday. Are these paycheck amounts taxable in the year of the work or the year of the paycheck? The tax year for a paycheck is important because it affects the taxable income for employees, as shown in employee gross pay on the W-2 forms for each year.

The paycheck date rules, even if the work was done and the pay was earned in a different year (but read the exception below). That’s because the paycheck was available to the employees in January, but not in December.

The gross pay is taxable in 2020, not 2020. If you pay employees on the last day of December for this work, the paycheck date of December 31, 2020, and this would mean the pay is taxable income in 2020.

Why Is the Year of an Employee’s Paycheck Important?

The year the paycheck is taxed affects the taxable income of the employee. If an employee had a big end-of-year bonus, for example, it could affect the employee’s tax rate. In some years, there is an extra pay period, which can cause employees to receive what appears to be an “extra” paycheck.

Give employees to change their W-4 form for bonuses or that extra end-of-year paycheck. For example, the employee can change withholding for the bonus check and change back to regular withholding for the next regular payroll.

The issue comes up when a pay period doesn’t end on the last day of the year. If the pay period ends before the end of the year, there are few days in the first year that will be paid in the next year. If the pay period ends after the end of the year, there are a few extra days in the next year’s pay.

Direct Deposits

If you make paychecks available to employees before the end of the year—through direct deposit, for example—the pay must be considered to be received (and taxable) in that year, even if the direct deposit check includes income for the following year.

The IRS says that income is constructively received when it’s credited to an account or made available without restriction. Constructive receipt is an accounting term that refers to when income is considered to be in the possession of someone and when it is available to be spent. Employees must report income in the year it was received or made available without restriction. 

Post-Dated Checks and Constructive Receipt

In general, when a person receives a payment by mail, it could be considered that the person has constructive receipt of the funds. But that’s not always true. A check might be post-dated.

A post-dated check is a check that has a future date on it. If you receive a check in 2020 that is dated 2021, you can’t cash it until the next year. Just because you have the check in your hand, because it’s dated in the next year—and not cashable until then—the check would be included in the next year’s taxes.

How Does This Rule Affect Employee W-2 Forms?

W-2 forms are the forms you give employees in January to provide information on their pay and amounts withheld for federal income taxes and FICA taxes (social security and Medicare).

The last paycheck dated in December is included in that year’s W-2 earnings. The first paycheck in January is included in the new year’s W-2 earnings.

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After you prepare those W-2 forms, they must be distributed to employees and filed with the Social Security Administration. Here are the dates to remember: W-2 forms must be given to employees by the end of January, for the prior year’s wages. You must also file W-2 forms with the Social Security Administration by January 31 (not February 28, as in previous years. If you are using payroll accounting software, the software should take care of the tax issue for the employee W-2s.

Year-End Payroll Guide

October & November

Verify the following information for the company:

  • Tax IDs
  • Legal name
  • Legal address
  • Federal, state, and local (if applicable) tax identification numbers
  • State unemployment rates

On the Company tab, review each page to verify that information is accurate. If you find an error, make your changes on the Company Info and Company Tax pages.

W-2s will be shipped to the shipping address associated with your account, which may be different from your business’s legal address.

You can verify your W-2 shipping address.

  1. On the Company tab, click on Shipping Information
  2. View your W-2 Shipping address, and contact your ADP ® Service Team to make any necessary changes.

Please note that W-2s cannot be delivered to a P.O. Box.

If you do not have online access to this information, you may verify your shipping address with the ADP Service Team.

Make sure that everything is up to date and correct for each of your employees and contractors. Did anyone move, get married, divorced, or have children?

For employees, double-check:

  • Employee name (is it spelled correctly?)
  • Social Security Number (SSN)
  • Employee address (is it accurate?)
  • Lived-in jurisdiction
  • Worked-in jurisdiction
  • Paid time off information
  • Status (active, terminated, LOA)
  • Filing status (exempt or non-exempt)
  • Number of exemptions
  • Year-to-date wages
  • Year-to-date taxes
  • Pre-tax year-to-date amounts (such as 401k and Medical 125)

* Helpful Hint: When an incorrect SSN is filed, the Social Security Administration (SSA) charges a fee to correct the wages posted incorrectly to the wrong individual. To help avoid this issue, the SSA provides a free verification tool on their website.

You can verify that your employees’ names and SSNs match Social Security’s records using the free verification service that the SSA provides on their website.

For contractors, double-check:

  • Name
  • Taxpayer’s Identification number (TIN)
  • Address
  • State work locations and, if applicable, local work locations
  • Earnings totals for each jurisdiction

If you have to change non-payroll data, such as an address, make the changes on the Employee Info page, on the appropriate Employee’s Tax page, or on the contractor’s 1099 Info page.

Helpful reports for employee verification:

  1. Starting Point: Reports
  2. Select Employee Summary (under Misc), W-2 Preview (under Misc), and Wage and Tax Register (under Taxes).

Review the information in the reports. You can also print them or export the data to Excel. If any information is not accurate, make the needed corrections.

Important: If you make corrections to wages, taxes, or jurisdictions, you must run a special payroll to process the corrections.

Veterans Day is observed on Monday, November 11 and some banks may be closed. If your check date falls on this date, please adjust it to avoid delaying your employees’ direct deposits.

Thanksgiving Day is Thursday, November 28. If your check date falls on this date, please adjust it to avoid delaying your employees’ direct deposits and delivery of your payroll package.

Heads up! There will be no payroll deliveries on Thanksgiving Day. Payrolls processed on Wednesday, 11/27 will be delivered Friday, 11/29.

Before the last scheduled payroll of the quarter, make sure you update any employee totals that you want to include in the quarter balances. You can update totals for any of the following items:

  • Manual checks
  • Voided checks
  • Third party sick payments
  • Group term life insurance
  • Dependent care benefits
  • Moving expenses
  • 401(k) and cafeteria plans
  • Retirement plans
  • Paid time off
  • Taxable fringe benefits
  • Any other necessary adjustments to employee wage and tax amounts

In the fourth quarter, before December 31, you must update missing totals for your employees and run any bonus payrolls. If you have to run a special payroll (to process manual checks, voided checks, or third party sick payments) after the last day of the quarter, government agencies may charge you with penalties and interest based on their deposit and filing deadlines for taxes. Tax Filing Clients: Amendment fees may apply.

View your employees’ year-to-date earnings and deductions in the Reports section of RUN Powered by ADP ® or Payroll Plus ® .

The U.S. Department of Labor released a final rule, effective January 1, 2020, that will increase the minimum salary required to qualify for certain overtime exemptions of the Fair Labor Standards Act (FLSA).

  • Increases minimum salary requirements from $455 to $684 per week ($35,568 per year) for the administrative, professional (including the salaried computer professional) and executive exemptions.
  • Permits employers to use nondiscretionary bonuses, incentive payments and commissions, that are paid at least annually, to satisfy up to 10 percent of the minimum salary requirement for administrative, professional and executive exemptions.
  • Increases the total annual compensation requirement for the “highly compensated employee” exemption from $100,000 to $107,432 per year (at least $684 must be paid on a weekly salary basis).

Please identify employees who currently earn less than $35,568 annually and are exempt from overtime. If you have employees who fall beneath the new salary threshold, you have two options:

  • Raise their salaries to meet the new requirement; or
  • Reclassify them as non-exempt and pay overtime whenever they work more than 40 hours per week.

To find additional information and resources on the new rule, please click here.

Important Note: Some states have their own salary requirements that already exceed the new federal rule. Some other states may decide to increase their salary thresholds based on the new federal rule. Review both federal and state law to determine whether an employee may be classified as exempt from overtime. If an employee is covered by both federal and state law but doesn’t meet both sets of tests, consult with counsel to determine how you should classify the employee in that particular situation.

Federal legislation requires the reporting of both taxable and non-taxable sick payments made to employees from a third party. Taxes withheld on those payments must also be reported. Sick pay should be included on either the employees’ W-2s or on a separate form provided by the third party. If third party sick pay is not reported by the third party, it must be included on your employees’ W-2s.

It is important that you obtain this information from the appropriate third party provider as soon as possible. These entries must be processed on or before your last payroll of the year to ensure that your Form 941 and W-2 reports are accurate.

Most carriers provide third party sick pay statements throughout the year. This reporting method allows employers to review and submit third party sick pay adjustments throughout the year, rather than only at year end. Please use those statements to report the information no later than December 31, 2020.

To report third party sick pay within RUN Powered by ADP ® or Payroll Plus ® :

  • Go to the Home > Payroll tab
  • Click on Third Party Sick Pay
  • Select the employee and key in the required information

Helpful tips when reporting:

  • Be sure to review your employee’s third party sick pay YTD (year-to-date) amounts on file to check for any previous dollars entered. Then verify the amounts are truly YTD amounts. This will help ensure the proper third party sick pay amounts are entered.
  • If you realize you need to report additional items after you have already processed your last payroll for the year, you will need to run a special payroll and date it: 12/31/YY (“YY” being the current tax year).
  • You will need to process a special payroll to include the third party sick pay reporting, otherwise it will remain in pending items.

A fringe benefit is a form of compensation for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.

Any fringe benefit your company provides is taxable and must be included in the employee’s pay unless the law specifically excludes it. The benefit is subject to taxes and must be reported on the employee’s W-2. Click here for a list of fringe benefit earnings and where they appear on your employees’ W-2s.

In the Company Tab, select Earnings and Deductions then:

  1. Click Add Earning.
  2. In the Category field, select Fringe Benefits.
  3. In the Earning field, select the fringe benefit that you want to add. Click here for a list of fringe benefits.
  4. Click Save and go back to the Earnings and Deductions Info page. The fringe benefit is included in the Earnings list and is displayed as active.

* Helpful Hint: Services like company cars and gym memberships are taxable. Learn more about these benefits and how they are reported. You can also refer to Publication 15-B, The Employer’s Tax Guide to Fringe Benefits, as prepared by the IRS.

All Vermont employers that are required to withhold income tax must report the total cost of employer-sponsored health care coverage.

The total cost paid by the employer and employee should be reported on the State Copy of the W-2 form in Box 12.

Unlike the federal mandate, employers with 250 or less employees are also required to report the total cost of employer-sponsored health care coverage.

In the Company Tab, select Earnings and Deductions then:

  1. Click Add Earning.
  2. In the Category field, select Fringe Benefits.
  3. In the Earning field, select the fringe benefit ER –Sponsored Healthcare.
  4. Click Save and go back to the Earnings and Deductions Info page. The fringe benefit is included in the Earnings list and is displayed as active.
  5. Enter the Healthcare amounts on each applicable employee.

The Affordable Care Act (ACA) requires certain employers to report health coverage information to their employees and the IRS annually.

Your resources:

Note: Please check with your respective states for individual reporting requirements.

Good news! There is no Federal Unemployment Tax Act (FUTA) credit reduction for 2020.

Household employees are those who work in and around your private residence, such as housekeepers, nannies, and gardeners. Because tax filing due dates are inconsistent with typical quarter-end cutoff dates, there are limitations to what ADP® can and cannot do to help you file:

ADP responsibilities:

  • Deposit and file state and local taxes for a household account.
  • ADP will not deposit or file federal taxes for a household account.
  • ADP will impound federal taxes with each payroll.
  • Prior to the deadline for depositing and filing estimated tax payments, the impounded money will be refunded to you a few days prior to when deposits are due each quarter.
  • The IRS requires all estimated tax payments for household accounts be made by April 15 (Q1), June 15 (Q2), and September 15 (Q3) of the current year. All remaining taxes are due on January 15 of the following year.

What you need to do:

  • You must deposit the federal taxes for the household account on Form 1040ES.
  • You must file federal taxes using a 1040 Schedule H.

What to expect:

  • ADP will send you a Statement of Deposit (SOD) with filing instructions, plus a credit for the total amount of federal taxes for the quarter. Liabilities on the SOD are summarized based on the cutoff for Household filings.
  • You will receive this information seven days prior to the due date.
  • You will receive a Form 941 each quarter from ADP. You may keep this form for your records, however, you will need to file your own taxes using a 1040 Schedule H.
  • You may be required to make the estimates or you may pay the entire amount when filing your 1040 (Schedule H). Please consult your Tax Professional to make this determination.

Although you can process a bonus payroll at any time during the year, many are processed at the end of the year.

There are two types of bonus earnings available in the payroll application: Bonus and Supplemental Bonus. It’s important to use the appropriate earning because each one is taxed differently.

  • Bonus earning: the bonus payroll is taxed at the regular rate, the same as a normal payroll.
  • Supplemental Bonus earning: the bonus payroll is taxed at the supplemental wage rates for federal and state income tax. For 2020, the federal rate is a flat 22% up to $1 million and 37% for amounts exceeding $1 million.

To be sure that your W-2 amounts are correct, process your bonus payrolls before the end of the year.

If you want to surprise your employees with the bonus, consider processing a special bonus payroll after you run your regular payroll. That way, the bonus amount won’t be included in the year-to-date total.

If your federal tax liabilities for the bonus payroll are over $100,000.00, the taxes must be deposited the business day after the check date.

* Helpful Hint: Learn more about how to process a bonus payroll here.

The Internal Revenue Service (IRS) has announced that a new Form W-4 will go into effect on January 1, 2020. The IRS has released a draft of the 2020 Form W-4 that includes major revisions and the final version is expected to be released soon.

To help you understand and prepare for these upcoming changes, ADP ® has created a comprehensive IRS 2020 Form W-4 Employer Toolkit, which gives you access to helpful resources including an employer guide, frequently asked questions, instructions on how to comply with the new 2020 withholding calculations, webcasts and more. You can access this toolkit NOW by clicking here.

You should continue to check the IRS website for the final version here and begin using it on January 1, 2020. The final form will also be available in the Help & Support section of the RUN Powered by ADP ® platform once released.

Important Note: Employees who submitted a Form W-4 prior to 2020 will not have to submit a new form. New employees, who begin on or after January 1, 2020, and existing employees, who wish to adjust their withholding, must use the new Form W-4.

How Do I Time Income and Expenses at the End of the Tax Year?

If you are reading this in the fall, or even December it’s a good time to think about how you can save money on your business taxes by timing income and expenses.

Lower Your Tax Bill by Timing

Many businesses have found that they can minimize business taxes year-to-year by considering carefully when to make payments to increase expenses and tax deductions and push receipts to create income at the end of the tax year. In general, you want to move income into a year of lower taxes and expenses into a year of higher taxes, but this is a big over-simplification.

Cash Accounting and Year-End Timing

The first thing to check before you think about before you move payments and income between two years is what accounting method you are using. The accounting method you use for your business (cash or accrual) makes a difference in the timing of payments and income and in the determination of constructive receipt. Since most small businesses use cash accounting, the timing examples will focus on this method.

In an interview between The Balance SMB and CPA Gail Rosen, Rosen explained that if your business is on a cash basis, you can consider delaying the sending of late-in-the-year invoices, so payment is not received until 2020. Your business can also purchase items you want in 2020, instead of waiting till 2020. 

income. In cash accounting, you count business income when you actually or constructively receive it (explained below) during the tax year.

For example, let’s say you do $1000 of web design, and you send the customer a bill in December. You receive the payment in January. Under cash accounting, you count it as income in January when you receive the payment.

Expenses. It’s the same for expenses: If you receive a bill for $800 in December and you pay it in January, it counts as an expense in January.

The principle of constructive receipt applies to payments and income that cross over the end of the year. Constructive receipt only applies to businesses using the cash accounting method.

According to the IRS, constructive receipt means that income is constructively received when an amount is credited to your account or made available to you without “substantial restriction or limitation,” even if you don’t have possession of it.

For example, if your bank credits your business bank account with interest in December, you must count that as income in December, because it’s available to you. It’s considered income even if you didn’t withdraw it or enter it into your books until January. 

This discussion of cash vs. accrual accounting is a general overview. Your business situation is specific and there are many exceptions. Talk to your tax professional before you attempt to time income and expenses,

Timing Payments at Year-end

Before you start to think about timing income and expenses, you first have to determine when (this year or next year) you want to lower your business income for tax purposes. The usual strategy of small businesses is to lower your current year’s taxes by prepaying expenses and deferring income.

But Gail Rosen explains that the tax strategy of deferring income or prepaying expenses is not for everyone. If you are going to be a higher tax bracket for 2020, then you may consider doing the opposite in your tax planning. This is especially true for growing businesses. 

Some ways to lower your tax bill this year:

Make deductible gifts and donations. As explained by Gail Rosen, a charitable gift is deductible in the year paid. If the check is mailed unconditionally and clears in due course, the contribution is considered paid when mailed. A contribution charged on a credit card is deductible in the year the charge is made, not in any later year when the credit card company is paid   . Read more about business tax deductions for charitable gifts, to be sure the gift or donation is deductible to your business.

PrePay Expenses. if you are pre-paying your business insurance or loan, send the payment by credit card or make sure you mail the check in time to the recipient or charge your credit card by year-end. the recipient does not have to receive the payment by year-end.

Buy assets. When you buy an asset, you can take depreciation expense on that asset. This expense lowers your tax bill.

The IRS considers an asset to be owned by a business when it is “placed in service,” that is ​when it is ready and available for a specific use. 

You may be able to take a large part of the depreciation expense the first year you own an asset. Talk to your tax professional about buying assets.

Delay income. That doesn’t mean not cashing a check you received as payment, because you have received it even if you didn’t cash it (remember constructive receipt). You can delay sending out bills until after the first of the year to make sure you receive the money next year.

Timing Employee Pay and W-2 Income

Employee wages at year-end are sometimes tricky, because of constructive receipt. Employee wages must be recorded in the correct year, and the date of the paycheck is controlling. If a paycheck is dated in December, that is the year the employee is considered to have received the pay, even if the paycheck hasn’t been picked up yet.

Sometimes, paychecks reflect income from two years; the last week in December and the first week in January, for example. If the paycheck is dated in January, all of the income is considered to have been received in the second year, because the employee did not have receipt of the money in the first year.

But, if the employee had access to the wages in the first year “without substantial limitation or restriction” (remember constructive receipt), all of the money is considered to have been received in the same year. This might be the case if the money is deposited using direct deposit in December, for a pay period ending in January.

Some years have more pay periods, which might also affect the amount of an employee’s paycheck between two years.

This issue affects amounts on employee W-2 forms. Check with your tax professional if you aren’t sure how to allocate employee pay across two years.

Using a Credit Card for End-of-year Payments

It’s certainly appropriate to use a credit card to make those end-of-year payments. You don’t have to pay off the balance now, but the expense can be recorded this year. For example, if you buy a laptop for your business before the end of the year, using your business credit card, you can get the tax deduction this year and pay off the credit card next year.

1099 Reporting for Independent Contractors at Year-end

An independent contractor that performed work for your company may have received payment in early January, but you might have mailed (and recorded) the payment in December and recorded the payment as part of the contractor’s Form1099-MISC for this year.

The independent contractor should include the payment as it is reported on this year’s Form 1099-MISC, but subtract the payment and attach an explanation with the return. The independent contractor must then include the payment on next year’s return, even though no 1099 may be issued for next year.

Accrual Accounting and Year-end Timing

In accrual accounting, you generally report income in the year it is earned and deduct or capitalize expenses (by recording them as an asset and taking depreciation on them) in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.

Expenses are recorded when (a) the liability amount is set and recorded, and (b) the property or services are provided or the property is used. Some recurring items used during the year can be treated as incurred during the tax year, even if some events haven’t occurred. This might be the case if you buy a supply of copy paper and use it during the year.

Income is recorded in the year when your right to receive the income has occurred and you can determine the amount. If you are using the accrual method, you include an amount in gross income at the earliest date:

  • When you receive payment
  • When the income amount is due to you
  • When you earn the income
  • When title passes.

You can record advance payments by customers. If you use the accrual method, you can postpone including the advance payment in your business income until the next year, but not beyond that tax year.

For example, Let’s say you did $1000 of web design, and you sent the customer a bill in December. If you are using the accrual method:

  • The $1000 bill for your services must be included in your business income in December because that’s when you “incurred” the income.
  • The $180 expense for office supplies is included in your December expenses because the amount is fixed and you are using the office supplies. 

The timing of income and expenses to lower your tax bill is a complicated decision. This information is a general overview, not intended to be tax or legal advice. Discuss possible end-of-year timing with your tax professional.

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