The new year has a way of sneaking up on busy businesses, so now is the time to ask: how prepared are you for closing out 2020 payroll? Make sure your payroll team is ready (and avoid costly filing delays) with our checklists, answers to frequently asked questions, bank closing schedule and other tips.
Company level checklist
Double check your documents and avoid filing errors with this checklist:
- Make sure all W2s and annual filings use your legally registered address. This is particularly important if you started a new business within the past year and used your home address, then moved to a formal location. You can update your business address at irs.gov and applicable state agencies.
- Verify your Federal Identification Number (FEIN) and legal name on all documents. Any changes to your business entity will affect the assignment of wages and tax liabilities associated with each FEIN.
- Verify state and local identification numbers. Most agencies now require electronic filings and penalties may be assessed due to filing with an “Applied For” status.
- Meet with your accountant to update business income and expenses year-to-date and map out any planning strategies that can help you avoid audits and reduce your tax burden.
- Collect receipts for all expenses and bank statements that prove business checking account activity.
- Make sure you have tax returns going back at least three years (you’ll need them if you are audited). Note that the IRS has bolstered enforcement efforts in response to lower tax revenues. Thorough record-keeping, including proper employee documentation and payroll records, will help you avoid penalties in the event of an audit. The IRS recommends holding on to tax records for at least three years.
IMPORTANT TAX NOTE: If you applied for a new state identification number, it can take 2-6 weeks for confirmation to arrive via mail. If confirmation has not arrived, contact application agencies to get your new ID number, payment frequency and/or contribution rate. Many agencies no longer accept “Applied For” filings while you wait for your permanent ID, so be proactive and contact your state to ensure your registration has been received and completed to avoid unnecessary fees.
Employee level checklist
Use this checklist to verify employee records and report fringe benefits:
- Verify employee names, addresses and social security numbers. Double-check W2s to ensure employee social security numbers are correct. This is important because state agencies use W2s for wage reporting and unemployment purposes. Each missing or invalid social security number is subject to IRS penalty.
- Note that employer filings are due on March 1, 2021. Avoid W2c (correction) filings and associated fees by verifying all employee social security numbers well ahead of that date.
- Consult your payroll vendor for help with W2s. Your vendor can provide Active and Inactive employee rosters for your review. Prepare to mail employee W2s by January 31, 2021, and make sure you have a plan for employees who request duplicate W2s (including any associated reprint fees).
- Don’t forget about Health Savings Account (HSA) withholdings and contributions. Both employee withholdings and employer contributions must be reported on W2s (Box 12, Code W).
- Report all fringe benefits, including:
- Group Term Life (GPL): All employer GTL premium amounts exceeding $50,000 are subject to withholding taxes.
- S-Corporation/2% Shareholders Health Insurance: S-Corp premiums for health insurance provided to > 2% shareholders must be reported as income. It is not subject to social security or Medicare.
- Dependent Care: If both spouses are working, up to $5,000 in childcare expenses can be excluded from taxable income. Report dependent care on W2 Box 10.
- Personal Use of Company Vehicles: Personal use of company vehicles is fully taxable.
- Total Value of Health Insurance: If you’ve paid 250 or more employees, you must report the entire cost of health premiums for each employee on W2s (Box 12, Code DD). This does not include supplemental health, dental or vision.
- Miscellaneous Fringe Benefits: If you give employees tangible gifts or services such as real estate rentals, gift cards or electronics, their values are taxable and subject to withholding taxes.
- Audit proof your business! Make sure that you have I-9s on ALL employees, even ownership. Use the most current I-9 form (found on irs.gov). Verify employee identification before you sign any I-9 form.
- Review vacation days with staff over the next few months to optimize down time for your business.
- Meet with staff to discuss increased work hours to meet your business holiday needs.
- Review third-party sick pay totals for any employees receiving short- or long-term disability benefits during the year. Make sure these amounts have been reported to payroll and that your insurance provider is currently sending quarterly reports along with an annual reconciliation. Quarterly reports should be sent to payroll upon receipt. Most annual reconciliation reports will be provided in January.
Payroll preparation checklist
Make sure payroll is ready to roll with this checklist for 2020:
- Update employee deduction amounts and limits for medical, dental, 401k and any other applicable voluntary deductions.
- Verify that your company’s employee leave pay policies are scheduled to reset according to expectations.
- Check holidays and bank closings (below) to make any needed pay date adjustments. Note that if you have a semi-monthly or monthly payroll schedule, your new 2021 pay dates will appear on the last payroll summary report of 2020. Keep in mind that if bank holidays are on or near your pay date, you will need to submit payroll a day earlier than normal.
- Notify all employees to review their W-4 status. All employees claiming exempt must complete a new W-4 by February 12.
What’s new in 2021?
Make note of these changes to maintain compliance and accurately file in 2021
- The Old-Age, Survivors and Disability Income Insurance (OASDI) taxable wage base is increasing to $142,800 in 2021 from $137,700 in 2020 according to Social Security Administration. This equates to a maximum OASDI employee contribution of $8853.60 or 6.2% of the wage base. Employers are also required to match this amount.
- The Medicare portion of the FICA tax has no wage base for the employee share, as all taxable earnings require a 1.45% contribution rate with an extra 0.9% for > $200,000 of employee wages.
- New Health Savings Account (HSA) limits for 2021 will be $3,600 for individual coverage up from $3,550 and $7,200 for family coverage up from $7,100. HSA Catch Up contribution limit for participants age 55+ remains at $1,000. Deductibles for HSA eligible health plans must be at least $1,400 for individual coverage and $2,800 for family coverage.
- 401k, 403b and 457 contribution limits will remain at $19,000.. For participants age 50 and over the catch-up contribution also remains at $6,500. Simple plan contribution limits remain at $13,500. The catch-up contribution limit will remain at $3,000.
Frequently asked questions
Get answers to some of the most common questions we field. Q: What is the employee annual statement mailing deadline? A: Postmark or distribute statements by January 31, 2021. Q: What portion of employee HSA’s are reported on W2s? A: Report the total of both employee withholdings and employer contributions on Box 12, Code W. Q: Are social security numbers that start with the number “9” valid? A: No. Those are ITIN’s (Individual Taxpayer Identification Numbers). They’re used for federal tax reporting purposes only. They do not provide eligibility for social security benefits or earned income tax credit. Make sure all documents have valid employee social security numbers. Q: Do health insurance costs need to be reported on W2s? A: Yes, if you’ve paid 250 or more employees. The entire cost of health premiums for each employee must be reported on W2 Box 12, Code DD. Note that this figure should represent health insurance only, not supplement health, dental or vision. Q: What should I do if the U.S. Postal Service returns a W2 with an invalid address? A: If you have proof you attempted to deliver the W2, you are in compliance with IRS regulations. Keep the original postmark as proof and keep returned W2s on file in case an employee requests a copy later. Q: Does Deluxe Payroll supply 1099s if I issue them on my own? A: If you provide your own accounts-payable checks to employees, you’ll need to issue your own 1099s. You can purchase forms at checksimple.com.
2021 bank closure schedule
Keep these bank closure dates in mind for business banking in 2021, and prepare to submit payroll a day early to avoid late payments.
- January 1: New Year’s Day
- January 18: Martin Luther King, Jr. Day
- February 15: President’s Day
- May 31: Memorial Day
- July 4: Independence Day
- September 6: Labor Day
- October 11: Columbus Day
- November 11: Veterans Day
- November 25: Thanksgiving Day
- December 25: Christmas Day
If filings and regulations seem overwhelming, it might be time to partner with payroll experts who can eliminate stress and uncertainty through timely filings and ensured compliance. Look for a firm that offers professional payroll services such as:
- ACA Compliance Dashboard and Reporting
- Custom Fields/Custom Reports
- Employee Self Service and Onboarding
- EZ IRA Program
- Fully Integrated Time and Attendance Solution
- Applicant Tracking
- General Ledger
- HR Analytics Dashboard and Reporting
- Payroll Cards (Provided by Global Cash Card)
- Point-of-Sale and Time and Attendance Interfaces
- Poster Compliance Updates
- Premium Link
- Think HR Compliance Tools
Use the checklists and other information provided here to comply with IRS and state agency regulations; or, learn more about how Deluxe Payroll can help you prepare for and ensure year-round compliance.
Editor's note: This blog post was deemed accurate at the time of publication and may not reflect recent changes related to payroll law. The information provided in this blog does not, and is not intended to, constitute legal or financial advice.
Keep your business moving forward
Blog Small Business
Not sure what ACA forms you need to file as an employer? We've got you covered! Read our 2020 ACA reporting guide to learn what forms are required.
Blog Small Business
Here are 2020's deadlines for submitting ACA information to the IRS. Learn about this year's updates to the ACA and get familiar with associated penalties.
Blog Small Business
Visit Deluxe.com to learn about how to navigate the complexities of ACA Payroll Compliance.