As the end of the year approaches, it's important to be ready for your final payroll. Here's how to handle the accounting along with the important new IRS deadlines you need to meet.
Which Year Does the Final Paycheck Count Toward?
If your final pay period covers parts of two years, such as the last week in December and the first week in January, when you record the salary expense depends on whether you use cash or accrual accounting.
If you use cash-basis accounting, the salary expense is recorded when you actually make the payment. If you don't pay wages for a portion of December 2016 until January 2017, you record the full expense in 2017.
This applies to both your financial statements and your tax return.
If you use accrual-basis accounting, the salary expense is accrued when it is actually incurred. If a payroll dated Jan. 15, 2017, includes $140,000 in wages covering eight days in December 2016 and six days in January 2017, $80,000 counts for 2016 and $60,000 counts for 2017.
Generally, this is the same for financial and tax accounting, but there is one common exception.
If you make a payment to a related party who uses cash-basis accounting, you do not accrue the expense. Instead, you record the expense when you actually pay it as if you were also using cash-basis accounting. Related parties are defined under Section 267 of the Internal Revenue Code and include family members, S-corporation shareholders and large shareholders of other business entities.
When Do You Need to Pay Your Final Paycheck?
You should follow your usual pay schedule. You may legally make an early payment prior to the last day of the year to increase your wage expense deduction for the current year, but this could increase your employees' tax bills because it increases what they received during the year.
You should not agree to delay paychecks until the new year for your employees. It is taxable to them when their pay is actually available. For example, if you have a regularly scheduled Dec. 30, 2016, paycheck, employees cannot delay paying taxes on that check by waiting until Jan. 1 to pick it up. For your accounting purposes, record the payment on Dec. 30 and include it on the 2016 W-2 or 1099 regardless of when it is picked up.
When Do You Need to File W-2s and 1099s?
The IRS now requires that you file all W-2s and 1099s by Jan. 31 regardless of whether you file on paper or electronically. The penalty for late filing starts at $50 for each individual form and increases up to $260 per form depending on how late it is filed.
A 30-day extension is available in limited circumstances and is not automatically approved. The IRS moved up the deadlines due to reduce errors and fraud, and it is strictly enforcing them.
What Should You Do to Prepare?
If you keep good records throughout the year, your final payroll should be no different than any other, and your taxes should just be a matter of plugging in the numbers. As the end of the year approaches, do the following:
- Ensure that you have an up-to-date W-4 or W-9 on file for each employee or contractor.
- Verify that you have properly paid all your employees, withheld the appropriate taxes, and deposited the withholdings with the IRS or your state.
- Ask your tax accountant whether you need to make withholding adjustments for the new year based on changes in tax rates or income brackets.
- Remind your employees to notify you if their filing status, number of exemptions or other information has changed so that their withholding amounts are correct.