KPMG Global Mobility Services professionals John Montgomery and Reagan Aikins discuss the top 10 issues companies should consider as they begin to manage year-end employment tax planning.
JOHN: Hello. And welcome to KPMG’s Employment Tax Year-end Top Ten Countdown. I’m John Montgomery, a partner in KPMG’s Employment Tax practice.
REAGAN: Hello Everyone. I am Reagan Aikins, a senior manager in our practice. Today we are going to countdown our top 10 things to think about for payroll as we approach year end, W-2 reporting requirements, and things to consider in 2020.
JOHN: It is hard to believe that year end is upon us.
REAGAN: I know John…another year gone but thankfully we haven’t aged a bit….Lets dive into our top 10 issues we see come up as clients begin to handle payroll year end and the start to a new payroll year.
JOHN: Yes…Let’s get started.
10: Team collaboration: Payroll isn’t just the payroll department. There are many components that go into and are reported by payroll including, retirement contributions, health insurance reporting, moving expenses and many more. Make sure you are connected to your HR and benefits teams as well as the tax department to ensure all necessary data is captured.
REAGAN: That’s a great point John. Collaboration is key. What about information from vendors outside of your organization?
JOHN: Perfect set-up for number 9 Reagan.
9: External information. Many clients have W-2 reportable data that includes information from third party vendors. Things like 3rd party sick pay to employees, long term assignment allowances and retirement contributions. Make sure you coordinate with your vendors to ensure timely delivery of payroll data as well as information needed to calculate gross ups or tax withholdings that are required for year end.
Over to you Reagan for number 8.
REAGAN: Thanks John.
8: Year-end bonuses and deferred compensation. Many companies pay year-end bonuses and employees may receive deferred compensation payments close to year end. These types of payments may require employment tax withholdings at the federal, state, and sometimes local levels. This often leaves a small window of time to calculate payroll and make timely payroll tax deposits especially around the holidays. If you know a vesting or bonus payout is coming at year end, make sure your payroll team is ready to execute timely payroll deposits.
JOHN: Oh….and don’t forget, when using supplemental withholding rates at the federal level, the thresholds change if an employee exceeds $1 million in supplemental wages during the year.
REAGAN: Right John, these late year payments could push an employee over that threshold and require additional withholdings. It’s always good to run a year end supplemental wage report….just to be sure!
JOHN: Reagan…What is number 7?
7: Reconciliations. Reconcile…reconcile…Reconcile. Do not wait until January to start reconciling year end payroll because if an error is discovered it may be too late to fix without having to do amended returns.
JOHN: I prefer to actually do reconciliations after the 3rd quarter payroll returns are filed with the taxing authorities. I reconcile through the first 9 months. It makes Q4 that much easier!
REAGAN: Absolutely John…come December year end processing is in full swing and makes it difficult to fix payroll errors that have been discovered. If we know an error in October, there is time to make adjustments and have it completed before year end!
JOHN: Thanks Reagan. I think number 6 is a big one with lots of detail. We may have to tackle this one together.
6: Fringe Benefits. We hear this all the time. Well, so, what does that mean?
REAGAN: John, Fringe Benefits are any benefit an employer provides to a worker. Depending on the value and whether it is a cash or noncash fringe benefit, it may or may not have a payroll reporting and withholding requirement.
JOHN: It sounds complicated Reagan.
REAGAN: Yes, it can be John…but that’s why we have an employment tax group. Some of the more consistent fringe benefits we see where we get questions from our clients include the value of group term life insurance, moving expenses, tuition reimbursement, use of company cars, and even use of corporate jets.
JOHN: That’s a lot of potential items that need to be included in payroll and the W-2 Reagan.
REAGAN: Very true John…and speaking of the W-2.
5: W-2’s. The Form W-2 is issued by an employer to an employee to report all wages and tax liabilities at the federal, state and local levels. There are many items on the W-2 that an employer should verify prior to its issuance, including such things as, verification of Social Security Numbers, ensuring social security wage base calculations are accurate, state and local tax reporting, and Box 12.
JOHN: Reagan, there are many codes that can be used in Box 12.
REAGAN: Yes, there are. Box 12 on the Form W-2 is used to report certain items that may be included in wages on the Form W-2 but also to report other items such as health care costs (code DD). Many people may be familiar with Code D, which shows the employee’s contribution to their retirement account. Or, Code C which reports the value of group term life insurance provided to an employee. The IRS publishes a complete list of Box 12 codes in the instructions to the Form W-2.
JOHN: Thanks Reagan…Box 12 is so important.
Well now that the W-2’s are covered, let’s not forget to think about 2020 because in the payroll world, we start on January 1st.
4: 2020 Tax changes. Every year there are new tax regulations and laws related to payroll compliance that may need to be implemented at the federal, state and local levels. New tax withholding tables, and wage bases should be updated in the payroll systems. For example, the Federal social security wage base limit in 2019 is $132,900, and we are still waiting for the 2020 amount (though it is projected to rise to $136,800).
REAGAN: John, Let’s not forget the states. State unemployment is paid in most cases based upon an employer’s experience rate in the state where an employee performs services. That rate changes every year. Further, state unemployment is paid up to a certain wage base (similar to what we just discussed for federal social security). Many states change those wage bases annually and that should be updated in the payroll system as well.
JOHN: Yes -- a lot to think about as we embark on a new year.
REAGAN: Absolutely…there are some other changes to consider as we move into 2020.
JOHN: Oh Reagan…do tell!
3: Form W-4. The IRS has issued draft versions of the 2020 Form W-4. The updated form has been created to assist employees in more accurately determining the amount of federal income taxes to have withheld from their paychecks that reflects their personal income tax liability. It is still in draft but the IRS, we hope, will issue the final form soon. Employees may complete these new forms to submit to payroll for next year once the final form is issued.
JOHN: O.K. We are almost to number 1.
2: Non-resident withholding. Well it wouldn’t be a discussion on employment taxes if we didn’t discuss nonresident withholding. Many states require an employer to source wages and withhold taxes based upon an employee performing services in that state regardless of where the employee resides.
REAGAN: From the first day they work in the state?
JOHN: Actually Reagan, it depends…. Many states have issued guidance that includes de minimis thresholds on when an employer needs to begin withholding on a non-resident employee’s wages based upon days worked by the employee in the state or dollars earned by the employee in the state. As a matter of fact, Illinois just recently passed legislation that establishes a 30-day de minimis threshold on an employer’s withholding requirement for non-resident employees performing services within Illinois. That new regulation is effective January 1, 2020.
REAGAN: Speaking of non-resident withholding… that leads us to the number 1 thing for employer’s to think about in 2020…drum roll please…..
1: 2020 bonus and equity payments. Many employers pay bonuses and other deferred compensation in the first quarter of a calendar year. Often times those payments are based upon services performed in the prior year, in this case 2019. Whenever this type of payment is made for services performed in a prior year, those wages may need to be allocated and withheld upon to the states where the employee performed services throughout 2019.
JOHN: Reagan, what about the de minimis thresholds we just discussed?
REAGAN: Well John, some states, New York as an example, in their audit guidelines, stipulate that the de minimis threshold doesn’t apply to payments made for services performed in prior years, so the rules may vary.
JOHN: I see. Thanks Reagan.
This has been a great top 10 list of considerations for our clients.
JOHN and REAGAN: Happy New Year!