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PAYTECH is the industry's primary source for payroll information. The monthly magazine covers payroll management, technology, new and pending legislation, professional development, and trends shaping the payroll industry and profession. All APA members receive PAYTECH as a benefit of membership, and the magazine is published monthly, except for an August/September combined issue. PAYTECH is available to members in both print and digital formats.


Improve Year-End Processes With Small But Significant Steps

BY: Jim Medlock, CPP | 08/28/20

Every year-end process is different but generally contains elements similar to the prior year. The processes for year-end 2020 will be significantly different from previous years. Sudden legislative actions, business closures, and the spread of the novel coronavirus will have an impact. Here are some questions you should ask this year:

  • How will the year-end project plan change if payroll professionals continue to work from home?
  • How will Forms W-2 be distributed?
  • How will the tax credits from the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act impact year-end reconciliations? 
  • Is 2020 the year to make significant changes to the year-end processes?

I recently read author James Clear’s book “Atomic Habits.” Clear argues that to make successful changes to a process, start by taking small steps that bring small successes that, when added together, will make significant improvements. “Atomic Habits” demonstrates the power of combining multiple, successful small process improvements to enhance the overall outcome of larger process goals.  

Let’s take a look at three major pieces of the year-end process—project plan, Forms W-2 distribution, and reconciliations—and how improving small pieces of each can improve your overall year-end process.

Create a Project Plan

To ensure all the year-end processes are completed timely, begin with a project plan. A tracking tool is recommended. From something as simple as using a spreadsheet to using a complex tool as Microsoft Project, many options are available. Capterra, a division of Gartner, provides reviews on project management software. 

The project plan needs to document the following: 

  • Each task 
  • Who is responsible for each task 
  • When the task is to be completed 
  • Which subsequent tasks are contingent to the task at hand

Start the project plan with the one from the prior year. Then, add new tasks that have been identified during the year. When developing due dates, start with the due dates for Forms W-2, 941, 940, and state reconciliation and unemployment tax filings. Further adjustments of the due dates will be based on the final payroll of the year and when the final adjustment payroll must be prepared. 

Many of the tasks in the year-end project plan will require that other tasks be completed. Be sure to review these contingent tasks to ensure that no task is required to be completed before the tasks it is contingent on are completed.

During the regular year-end process meetings, have each team member report on the status of each task and any issues that may cause the task to be completed after the due date.

While the year-end project continues, do the following:

  • Add any tasks that were missed
  • Update contingencies that were missed
  • Track the actual completion dates for each task

W-2 Forms Distribution

For nearly 20 years, the IRS has allowed employers the ability to distribute W-2 forms electronically, providing companies significant savings in the cost of forms and postage. However, when I talk to payroll professionals, I hear that many organizations do not distribute the same percentage of W-2 forms electronically as they pay employees electronically. 

Why does this happen? In my opinion, it is because W-2 distribution only happens once a year, while electronic payments occur every payday. In many organizations, the promotion of electronic distribution of Forms W-2 only happens as an afterthought in January. 

Promotion of the electronic distribution of W-2 forms should begin in new hire orientation. New hire orientation typically includes information for new employees on how they can be paid electronically (either through direct deposit or payroll cards) but may not include electronic distribution of W-2 forms. Include in the new hire orientation packet a request for the employee’s consent to receive their Form W-2 electronically while providing the IRS’ required disclosures for the electronic distribution of W-2 forms is a best practice. This small step can increase the number of employees receiving their W-2 forms electronically. 

Remember to include the following IRS-required disclosures to your new hire orientation process:

  1. The scope and duration of the consent to receive an electronic Form W-2, letting the employee know the Forms W-2 that will be covered by their consent. Example: Beginning with the 2020 Form W-2, you will receive your Form W-2 each year electronically by downloading it from self-service. You will receive an email when your W-2 is available for you to download.
  2. The ability to withdraw the consent and how the employee can withdraw his or her consent. Example: You may elect to have your Form W-2 mailed to you on January 31 by removing your election to receive it electronically in self-service. If you choose to change your election to receive your Form W-2 electronically, the change must occur by December 31.
  3. Whether a request for a paper Form W-2 will be treated as a withdrawal of consent.
    Example: A request to have a Form W-2 mailed to you will cause all future ones to be mailed on January 31.
  4. The hardware and software required to access, print, and retain the Form W-2.
    Example: To access your Form W-2, you will need to have an internet connection through an internet browser to use self-service. To be able to print and save your Form W-2, you will need to have Adobe Acrobat Reader installed on the computer you use to access it.
  5. The right to receive a paper Form W-2, if consent is not given. Example: If you do not elect to receive your Form W-2 through self-service, it will be mailed to your most current address on record on January 31.
  6. The conditions under which the employer will stop providing the Form W-2 electronically. Example: If your employment ends, your access to self-service will end. You will not be able to access your Form W-2 electronically after your employment ends, and it will be mailed to you on January 31.
  7. The procedures for updating the employee’s contact information. Example: At least quarterly you should access self-service to confirm that your contact information (address, phone, personal email, etc.) is correct.

In addition to including the information on how to elect to receive an electronic Form W-2 in the new hire packet, regular reminders should be included in employee newsletters, the self-service portal, and emails to the employees concerning their Form W-2.  Open enrollment is another good time to remind employees to sign up for an electronic Form W-2. You can lead them to the authorization page after they complete their benefit elections. 

Reconciliations

Every year, the reconciliation between the total on an employee’s Form W-2 and their quarterly employer’s tax return (Form 941) must begin with the first payroll in January. Start your reconciliation process by downloading the data from each payroll register into the reconciliation spreadsheet to facilitate the quarter-to-date and year-to-date reconciliations at the end of each payroll processing. For example, you may want to have a multi-tab spreadsheet with each tab containing the following data:

  • Year-to-date amounts to balance the final Form W-2 to the four quarterly Forms 941 and to the state reconciliation and unemployment tax returns that include:
    • All the data elements on Forms W-2 and 941
    • Each state’s taxable income and withheld income tax 
    • Wages subject to the Federal Unemployment Tax Act (FUTA) and the FUTA tax to balance to the Form 940
    • Wages subject to each state’s unemployment tax and the state unemployment tax to balance to the state unemployment returns 
  • First-quarter payroll data consisting of all the data elements on Forms W-2 and 941 and each state’s income and unemployment tax forms. Include wages subject to the FUTA and the FUTA tax.
  • Second-quarter payroll data, include all data elements from the first quarter
  • Third-quarter payroll data, include all data elements from the first quarter
  • Fourth-quarter payroll data, include all data elements from the first quarter
  • First-quarter federal and state payroll tax deposits
  • Second-quarter federal and state payroll tax deposits
  • Third-quarter federal and state payroll tax deposits
  • Fourth-quarter federal and state payroll tax deposits

At the end of each quarter, the 941 data and W-2 data must be balanced using the formulas in Table 1. After the Forms 941 are filed with the IRS and Forms W-2 are filed with the SSA each year, both agencies will also perform a reconciliation. The IRS focuses on the income, social security, Medicare, and Additional Medicare tax reconciliations, while the SSA focuses on the social security and Medicare wage reconciliations.

Table 1—Formulas to Help Balance 941, W-2 Data

Form 941, Employer’s Quarterly Federal Tax Return

 

Form W-2, Wage and Tax Statement

Line 2, Wages, tips, and other compensation

=

Box 1, Wages, tips, other compensation

Line 3, Federal income tax withheld from wages, tips, and other compensation

=

Box 2, Federal income tax

Line 5a Column 1, Taxable social security wages

=

Box 3, Social security wages

Line 5a Column 2, Social security tax on wages + Line 5b Column 2, Social security tax on tips

=

[Box 4, Social security tax withheld X 2] + [Box 7 social security tips X 15.3%] (there may be a small rounding difference)

Line 5b Column 1, Taxable social security tips

=

Box 7, Social security tips

Line 5c Column 1, Taxable Medicare wages and tips

=

Box 5, Medicare wages and tips

Line 5c Column 2, Medicare tax on wages

=

Box 6, Medicare tax withheld X 2 (there may be a small rounding difference)

Line 5d Column 1, Taxable wages and tips subject to Additional Medicare Tax withholding

=

The amount in Box 5, Medicare wages and tips that is greater than $200,000

Line 5d Column 2, Additional Medicare Tax withholding

=

The amount in Box 5 that is greater than $200,000 X 0.9%

In 2020, beginning with the second quarter’s Form 941, additional reconciliations are required as the FFCRA and the CARES Act provided tax credits and deferrals that are reported on Form 941. Additional lines have been added to the Form 941 to report FFCRA and CARES credits to the IRS. A worksheet can be found in the Instructions for Form 941. The worksheet should have a separate tab for each quarter in the reconciliation spreadsheet.

Based on the FFCRA and CARES credits that the organization is claiming with each payroll, the values of the following items must be included in the reconciliation. You will find Worksheet 1 in the Form 941’s instructions. This worksheet provides the steps that are taken to determine the refundable and nonrefundable tax credits for Sick and Family Wages and the Employee Retention. The data elements required for this reporting are as follows:

Qualified Sick Wages Allowed by the FFCRA

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the FFCRA credits for qualified sick wages are calculated. The nonrefundable portion of the qualified sick wages reduce the quarter’s tax liability that is reported on Schedule B. The refundable portion of the qualified sick wages does not reduce the quarter’s tax liability that is reported on Schedule B.

Qualified Health Plan Expenses Allocated to FFCRA’s Qualified Sick Wages

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the FFCRA credits for qualified health plan expenses allocated to qualified sick wages are calculated. When preparing Form 941’s Worksheet 1, Credit for Sick and Family Leave Wages and the Employee Retention Credit, add the allocated qualified health plan expense to the qualified sick wages to calculate the allowed credits. The qualified health plan expenses are defined by the IRS as the portion of the cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions.

Qualified Family Leave Wages Allowed by the FFCRA

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the FFCRA credits for qualified family leave wages are calculated. The nonrefundable portion of the qualified family leave wages reduces the quarter’s tax liability that is reported on Schedule B. The refundable portion of the qualified family leave wages does not reduce the quarter’s tax liability that is reported on Schedule B.

Qualified Health Plan Expenses Allocated to FFCRA’s Qualified Family Leave Wages

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the FFCRA credits for qualified health plan expenses allocated to family leave wages are calculated. When preparing Form 941’s Worksheet 1, Credit for Sick and Family Leave Wages and the Employee Retention Credit, add the allocated qualified health plan expense to the qualified family leave wages to calculate the allowed credits. The qualified health plan expenses are defined by the IRS as the portion of the cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions.

Qualified Wages for the CARES Employee Retention Credit

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the CARES credits for qualified wages are calculated. The qualified wages from the quarter (separate the second, third, and fourth quarter’s wages) are eligible for the 50% employee retention credit.

Qualified Health Plan Expenses for the CARES Employee Retention Credit

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the CARES credits for qualified health plan expenses allocated to qualified wages are calculated. Add the qualified health plan expenses from the quarter (separate the second, third, and fourth quarters) to the qualified wages to calculate the 50% employee retention credit. For the second quarter, qualified wages for the CARES employee retention credit were paid from March 13, 2020, to March 31, 2020.

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the CARES credits for qualified wages (paid from March 13-31, 2020) are calculated. The qualified wages paid from March 13-31 are eligible for the 50% employee retention credit.

Qualified Health Plan Expenses Allocated to Qualified Wages for the CARES Employee Retention Credit Paid From March 13, 2020, to March 31, 2020

Using Worksheet 1 in the Form 941 instructions, the refundable and nonrefundable portion of the CARES credits for qualified health plan expenses allocated to qualified wages are calculated. Add the qualified health plan expenses from the quarter (paid from March 13-31, 2020) to the qualified wages to calculate the 50% employee retention credit.

Deferred Employer Social Security Tax Under CARES

The deposit of the employer’s social security tax liability from March 27 through December 31 may be deferred. The 50% of the deferred amount must be paid by December 31, 2021, with the remaining deferred amount paid by December 31, 2022.

Advances of FFCRA and CARES Credits Received From Filing Form(s) 7200

When the employer’s social security and Medicare taxes and the withheld federal income, social security, and Medicare taxes for a payroll are less than the credits based on the nonrefundable FFCRA sick wages and family leave wages and the employee retention credit, then an advance on the overpayment that would be reported on Form 941 can be requested to be paid to the organization by filing Form 7200. Tracking the payments from the IRS requested on Form 7200 is required to correctly complete Form 941.

FFCRA Credits Eligibility

In order to claim the tax credit, employees must be able to demonstrate that the amounts paid to employees  for emergency paid sick leave and emergency paid family and medical leave were for qualifying reasons under, and subject to the limits of, the FFCRA. Those limits are as follows:

  • Employers with fewer than 500 employees—CARES Act’s Employee Retention Credit eligibility (on qualified wages and health benefits paid from March 13 to December 31 and the ability to defer the employer social security tax liability incurred from March 27 to December 31)
  • Employers with fewer than 500 employees who did not obtain the CARES Act Payroll Protection Program loans
  • Employers with 500 or more employees

In “Atomic Habits,” Clear writes that “the secret to getting results that last is to never stop making improvements.” The best place to find improvements to your year-end processes is by registering for a class, webinar, or on-demand webinar with the APA. You can register for the year-end topic and delivery method that best works for you today.


Jim Medlock, CPP, is a Payroll Compliance Educator at Medlock and Associates and the former Education Advisor for the APA, where he served for 26 years. He was named Payroll Man of the Year in 1991. Upon retirement from the APA, he was presented in 2018 with an APA Team Member Legend award.


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