Written by Laura Palulis
In the wonderful world of payroll, many administrators wonder when they should begin to prepare for year-end. It has been my experience that too often this process begins in December, resulting in an extremely hectic few weeks trying to meet tight deadlines. Payroll and HR already have December holidays to contend with, not to mention year-end bonuses to process and taxable fringe benefits to calculate. As a result, year-end verifications and validations often begin the week between Christmas and New Year’s Day. Although many would agree that this is too late, the question is, in order to allow sufficient time to complete year-end payroll activities, when should year-end preparation begin?
As a veteran with over 20 years of experience in payroll, I am a firm believer that year-end begins at the end of January. This is the ideal time to begin preparing for the next year-end as 11 months gives you more than enough time. By the end of January, the W-2s and 1099s for the prior year have been printed and distributed, and tax filings have been completed.
I suggest that clients kick off preparations for the upcoming year-end with a post-mortem reviewing the previous year’s closing activities. Since these processes have recently wrapped up, and will be fresh in the team’s mind, it is the ideal time to gather a team and discuss what went wrong and why. It is also the perfect time to document the processes that went smoothly, so that they can be followed next year-end. For those processes that didn’t work so well, this is also the right time to document those processes, so you don’t repeat the ineffective processes for future year-end periods.
Another process that should begin in January is verification of employee names and social security numbers of new hires who have been brought into an organization after January 1st. Since that employee population won’t be receiving a W-2 until the following January, this is a logical point to verify social security numbers and avoid the $50 penalty for each mismatch. The Social Security Administration (SSA) offers employee verification as a free service. Payroll administrators can create a file that contains all employees hired over the course of a month. A process can be established to upload the file to SSA at the completion of each month. SSA will analyze the file overnight and results are usually received the next day. This process enables mismatches to be researched and resolved throughout the year, simultaneously helping to avoid processing cumbersome W-2Cs at year-end, along with reducing the chance for any IRS imposed penalty for mismatches.
Although most payroll administrators create their W-2 forms in January each year, I personally prefer to process them much earlier, typically in April. I create a file for the first three months of the year and save the output. Subsequently, I also create a file in July and October and save the output. This enables payroll to verify the W-2 results each quarter. Earnings and deductions can be reviewed for tax treatment, tax locations can be analyzed, and various W-2 boxes can be verified. By following this process, any W-2 issues at the end of the year can usually be isolated to the last quarter of the year, making it much easier to find these errors, which is half the battle.
Finally, I recommend creating a year-end balancing worksheet to keep running totals of gross wages, taxable wages, and corresponding taxes throughout the year. Many companies think that they can skip this step because their payroll vendor pays their taxes. However, the company officers are ultimately responsible for timely payments and filings. In the event of an error, you will be penalized, not your payroll software vendor. By balancing your tax reports, liabilities and deposits each quarter, you can head off problems and make the appropriate inquiries at the proper point in the year. Similarly, if you are in balance for the first three quarters, you are easily able to trace any year-end discrepancies to the fourth quarter of the year.
By following these suggestions, payroll administrators can identify, review and correct problems during the year, leading to a more efficient and productive year-end. When W-2Cs are reduced, payroll administrators and their employees are happy, which is a big win for your organization. Plus, getting ahead of year-end issues throughout the year will help you have a much less hectic December and January, and who wouldn’t want that?
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About Laura Palulis
Laura Palulis is a System Consultant with HRchitect, the leader in HCM systems strategic consulting. Laura has over 20 years of experience in the payroll and tax field and was an Ultimate Software customer for 18 years. When not working with customers, Laura can be found hiking, quilting and travelling the world.