Managing Year-End Payroll & 1099 Reporting for 2023
 |
|
| Tim Pass, CPA. Smith Schafer |
It is time to focus on wrapping up 2023 and gearing up for the new payroll year. There are certain payroll requirements you must complete. Use our end-of-year payroll checklist to complete all your payroll and 1099 tasks on time and set your business up for a successful new year.
1099 Reporting
Form 1099 forms are due to recipients by January 31, 2024. The forms are also due to the IRS by January 31, 2024, in most cases. For 2024, the e-filing rules for 1099s have changed. If you are issuing more than 10 forms (W2s and 1099 combined), you are now required to electronically file the 1099 forms to the IRS.
1099 Downloadable Worksheet here.
Note: The IRS can access failure to file penalties. Penalties may be up to $550 per form if failures are deemed to be an intentional disregard to file.
Form W-2 Reporting
The following is a list of fringe benefits required by the IRS to be included in employees’ W-2s:
- Health and dental insurance premiums paid for S-corporation shareholders
- Life insurance premiums paid for S-corporation shareholders
- Long-term care insurance premiums paid for S-corporation shareholders
- Disability insurance (STD & LTD) premiums paid for S-corporation shareholders
- Health insurance premiums paid for employees (see below for additional information)
- Group term life insurance above $50,000
- Personal use of company-owned vehicles - Downloadable Worksheet here
- Certain transportation, commuting, and parking benefits
Employer Social Security Numbers
The IRS allows the truncation of employee social security numbers on the employee copy of the W-2. Do not truncate the employee’s SSN on the copies filed with the social security administration or other state and local agencies. The truncation is optional for employers, for those choosing to do so, the SSN should be formatted as follows: xxx-xx-1234.
Minnesota Revenue
Minnesota requires electronic filing of Form W-2 and Form 1099 (with MN withholding) if you have more than 10 forms. Submit forms using your Minnesota e-Services account.
Cafeteria Plan
The amount that an employee can contribute to a flexible spending account (FSA) of a cafeteria plan for health expenditures is limited to $3,050 in 2023 and $3,200 in 2024.
Dependent Care
The maximum contribution amount an employee can make is $5,000 per year. Employers offering this benefit as part of their cafeteria plans need to be aware that additional reporting is required on the W-2.
Health Insurance Premiums
Employers who issue 250 or more W-2 Forms are required to disclose the cost of employer-sponsored health coverage. These amounts should include employer-paid and employee contribution. Amounts are reported in box 12 with code DD. Employers with fewer than 250 employees are exempt from this disclosure requirement.
ACA Reporting
Employers that are applicable large employers (at least 50 full-time equivalent employees) are required to provide employees with forms 1095-C on or before April 1, 2024. The due date for filing 1094-C/1095-C by paper filing with the IRS is February 28, 2024, and for electronic filing with the IRS is April 1, 2024.
Health Savings Account
Health savings accounts (HSA) may only be used in conjunction with a high-deductible health insurance plan. The total amount an employee or employer can contribute to an HSA account is limited to $3,850 for single coverage and $7,750 for family coverage in 2023 and $4,150 and $8,300, respectively, for 2024. Taxpayers age 55 can make an additional catch-up contribution of $1,000 for both 2023 and 2024
Federal Unemployment Tax (FUTA)
The standard FUTA rate is 6.0%; generally, employers receive a credit of 5.4% when they file their Form 940. This results in a net FUTA rate for most states of 0.6%. However, some states are subject to a FUTA credit reduction if they have not repaid loans from the federal unemployment trust fund. For 2023, Minnesota is not a credit reduction state and is eligible for the full credit of 5.4%. For a complete list of credit reduction states, visit the IRS website and search FUTA Credit Reduction.
Internal Revenue Service website
FICA Tax
The 2023 Social Security wage base is $160,200 but will increase to $168,600 for 2024. The employee and employer social security tax rate is unchanged at 6.2%. The Medicare tax rate is also unchanged at 1.45%. Employers are required to withhold the additional Medicare tax on employee wages in excess of $200,000 at a rate of .9%. This is an employee tax only and not matched by the employer.
YEAR-END PAYROLL GUIDE
Below is a simple guide that walks you through your year-end payroll responsibilities. We have broken down the year-end payroll process into nine easy steps. This way, you can close out your payroll and ensure that you file all the proper tax forms on-time. To make things even easier for you, we have also created a printable Year-End Payroll Checklist so you can mark your progress.
Download the Year-End Payroll Checklist
1. Confirm Employee Information
Is employee information correct? Ensure employee records are accurate for each employee's:
- Full legal name
- Social security number
- Current address
This information should already be in the employee personnel record, but now is the time to correct mistakes before distributing year-end W-2 forms to each employee. A missing or incorrect name or Social Security number can lead to penalties or additional work to amend returns. More Info
2. Make Sure all Payroll is Recorded
Include all payments for commissions, bonus pay, or anything run outside of the normal payroll schedule (e.g., retro pay). Do not forget to include handwritten checks. And, make sure you accurately recorded any voided paychecks you had throughout the year.
3. Verify Employee Benefits & Deductions
Double-check each employee’s benefits and their deductions. If any benefits are not accounted for, add these to the last paycheck.
- Disability insurance
- Group life term insurance
- Personal use of company vehicle
- For S-Corp owners, make sure to include health insurance payments for the year in federal and state wages
- Keep track of any paid time off. Depending on company policy, employees may want to cash out their accrued time instead of carrying it forward
4. Make Sure Your Employer Information is up-to-date
Review business' legal name, address, and Employer Identification Number to ensure everything is accurate.
5. Bring Everything Together with a Reconciliation
Look at previously filed quarterly payroll reports, and well as the one for fourth quarter, and tie them out to the W-3 form totals. Make sure to reconcile your payroll bank account to ensure all federal and state taxes paid match the payroll tax liability records.
6. Confirm Tax Deposit Frequency for the New Year
Deposit requirements can change each year. To ensure no missed deadlines, review your lookback period for IRS withholding to confirm the correct deposit frequency heading into January 2024. For 941 filers the (quarterly) lookback period is July 1, 2022 - June 30, 2023. For employers that are 944 (annual) filers for the current year, or in the past two years, the lookback period is the 2022 calendar year. Employers that have reported $50,000 or less in tax liability for the lookback period, are monthly depositors. Employers over the $50,000 in tax liability for the lookback period, are a semiweekly depositors. The IRS and/or State agencies may have sent a notice before the end of the year regarding a change in tax deposit/filing frequencies for the coming year.
7. Check your Tax Rates
It is important to check for new tax rates for state unemployment and disability insurance. Agencies begin sending in November notices of upcoming rate changes. Update your payroll systems with the new rates effective January 1. Download or update your payroll software with the new year's withholding tables after the final payroll of 2023 is issued.
8. Ask Employees to Review Withholding Allowances
Although employees can typically change W-4 forms at any time, encourage them to review their withholding allowances at the end of the year. Employees indicate their withholding preferences for federal income tax on Form W-4. Generally, employees will need to fill out a separate state W-4 for state income tax withholding. This varies by state.
9. After the New Year
When you start processing payroll in 2024, there are some additional tasks that carry over into the new year. You should keep in mind that you still need to:
- Update your payroll for any raises or deductions for employees for the new year
- Distribute form W-2 to employees by January 31.
- File W-2 and W-3 with the Social Security Administration by January 31.
