Your Guide to Year-end Payroll Reporting

Year-end payroll reporting is the process of reporting on an organization's payroll for a given year. It usually includes wages paid and employee and employer tax liability. Keep reading for an overview of what year-end reporting is as well as some tips to help you keep your head on straight during this crazy time of year.

Tackling year-end payroll reporting can feel stressful and overwhelming, especially if you don't know where to start. And that stress can compound if you wait until the last few days of December to pull a year's worth of payroll data. Consider these questions you may be asking yourself in a manic state on December 27th:

What information is needed and why?
What's the purpose of a year-end payroll report?
Does someone write the report?
Is it produced by a payroll system?
Who's even going to read it?
Do we have to do it?

Don't worry, SPARK connected with the experts so you're not left hanging at the end of the year. These experts, Benjamin Poor, Tom Crowley and Charles Collins — members of ADP's government affairs team — led an annual webinar that reviewed tax changes and their implications for year-end reporting. (Launch it here: Strategies for surviving year-end reporting)

For now, SPARK is going to provide a mini crash course to help you feel empowered and informed.

What is year-end payroll reporting?

Year-end payroll reporting is the process of reporting on an organization's payroll for a given tax year. Reports show a breakdown of wages, hours and tax liability. They usually include summary documents like Forms W-2 and Forms W-3, which are employees' individual wage and tax summaries, and the company's collective wage and tax summary, respectively. Other forms often included are Forms 940 and Forms 941, which detail federal income tax and unemployment tax. We know you probably just did a facepalm. Yes, it's a lot, but don't worry, we are going to walk you through where to get these reports and help you ensure they are accurate prior to year-end so you're not running around frantically during the last few days of the year.

Is there a difference between year-end payroll reports and annual financial reports?

Yes, there is a big difference between year-end payroll reports and annual financial reports. The difference is that annual financial reports encompass the financial state of the business as a whole. This means they include things beyond the company's payroll, like financial statements. You can think of annual financial reports as a giant snapshot of how an organization is doing at the close of the fiscal year.

So, what is a year-end payroll report? Year-end payroll reports, on the other hand, are reports that are specific to payroll, and they detail the organization's payroll cost, wages paid out, as well as total tax liability on a local, state and federal level. This means you can take a deep breath, because if you are overseeing year-end payroll reports this year, that's a lot smaller task than overseeing annual financial reporting. Phew!

What should be included in year-end payroll reports?

Items to be included in year-end payroll reports are detailed files showing total wages paid out. Tax liability should also be shown on a local, state and federal level, as well as Medicare tax, Social Security tax, Federal Unemployment Tax and State Unemployment Tax if the organization is in a state that requires it. This information is detailed on the following forms:

Form W-2; individual employee wage and tax information
Form W-3; company totals wage and tax information
Form 941 and Form 940; company tax withholdings throughout the year
State and local tax and unemployment withholding forms

This may feel like a lot of documents, but the good news is, you are usually able to generate these reports on your payroll service provider's platform. For a full rundown of items to keep for employment tax record keeping, you can visit the IRS website's comprehensive list.

Can year-end payroll reports include inaccurate information by accident?

Yes, year-end payroll reports can generate inaccurately when information stored in the payroll platform is inaccurate. A common example of an inaccurate payroll report is a Form W-2 that doesn't show all the wages paid to the employee that year. This can happen if wages are paid to an employee outside the payroll platform and never recorded in the platform.

For example, if the boss writes paper checks to the company's top performers as a quarterly bonus, but the bonus is never recorded in the payroll platform, this will result in an incorrect Form W-2 that understates wages. The bonus money was received by the employee, but if the amount was never recorded in the payroll system, there will be a discrepancy between what the employee actually earned that year, and what the Form W-2 shows as earned. This can lead to (a.) an inaccurate total gross amount on Form W-2, and (b.) an incorrect tax liability amount reflected on Form W-2, Form W-3 (for the company totals) and on Form 941 and Form 940 as well as state and local tax returns.

For this reason, it's very important to be sure all wages are reflected accurately within the payroll processing platform prior to generating year-end payroll reports. If you're asking 'how do I prepare for a year-end payroll,' check out ADP's cheat sheet on what items to review prior to year-end on ADP's year-end checklist.

Do any COVID-19 laws affect my year-end payroll reports in 2022?

Payroll reporting is almost fully back to normal after three years of complex COVID-19 credits and regulations. The window to claim many of the COVID-19 tax credits, included in the Families First Coronavirus Retention Act (FFCRA), the American Rescue Plan Act (ARPA) and COBRA Premium Assistance, closed in 2021 (but the credit can be claimed on amended returns). There are very few ways that these credits could affect your year-end reporting, the most likely of which is through the reclassifying of wages.

Reclassifying wages is the process of changing wages and hours from how they were originally recorded to reflect as a different "kind" or "type" of wages and hours. Let's say that during 2020-2021 an employee of yours had a COVID-19 related absence, but was not able to provide documentation, so the hours the employee was on leave were classified as sick hours, PTO hours or unpaid hours. Perhaps now, they are able to provide documentation, proving the absence was COVID-19 related. In that case, the wages and hours can be reclassified under the FFCRA or ARPA, and the credit associated with those hours can now be claimed by the business. It's important to keep in mind that wages cannot just be reclassified for the sake of reclassifying. Reclassification needs to be a true reflection of qualified unworked hours.

Keep in mind that reclassification of these types of wages and hours should happen in the payroll platform prior to the platform generating year-end payroll documents like Forms W-2 and Forms W-3, etc. If the reclassification of hours and earnings — even if it's just for one person — is not processed until after these files have been generated, they will render the whole Form W-3 and Form 941 as incorrect for the entire organization. They will then have to be regenerated after the reclassification is made.

Another small but mighty year-end payroll reporting tip is to have employees make sure all their information is coded correctly. Sometimes, even if a name spelling is off by one letter, it can prevent the employee from filing their taxes. A new Form W-2 will have to be generated with the correct spelling. Form W-2 corrections are often costly and time consuming, so having employees check through their profiles prior to generating year-end reports can save time and money.

Does the Social Security deferral impact my year-end reporting in 2022?

Technically, no—however, if you took part in the Social Security tax deferral offered during the COVID-19 pandemic, this affects the 2022 year-end dramatically. While it doesn't effect reporting, it's still extremely important, so it still gets its own section. The Social Security tax deferral was a program implemented over two years ago to provide relief for employers by postponing their Social Security tax payments. So, what does a COVID-19 program from two years ago have to do with year-end for 2022, you ask? Well, a lot, because the second half of the deferred payments is due back at the end of the year. This means, if you participated in the Social Security deferral program during 2020, the remaining balance of the deferred payments must be paid at the close of 2022. Since Dec. 31 falls on a federal holiday, the amount is technically not due until Jan. 3, 2023. The IRS has made clear that any amounts submitted after the deadline will render the entire deferral invalid. So, if the payment is made late, the IRS will treat the amounts as if they were due on their original dates in 2020. Think "yikes."

Poor speaks to this in detail: "It's important to pay back the full installment payment by the due date because if any portion of the repayment is not made by the applicable date, the deferral itself will be made invalid. And this is a big deal because the deposits would then be treated as if they were due on the original date in 2020. At that point, a 10-percent penalty would be assessed on the underpayment amount. And if the tax is not paid within 10 days of the first IRS notice, the penalty is 15-percent of the underpaid amount."

Since failing to pay the deferred Social Security tax back on time could have such serious penalties, you are highly encouraged to consult with your CPA or accountant on this matter to make sure that, if you did take advantage of the deferral, it is fully paid back prior to Jan. 3, 2023.

Do remote workers affect my year-end payroll report?

Remote workers can have a profound effect on year-end payroll reporting due to changing tax jurisdictions. Many workers have opted to relocate, and companies have also started hiring more remote workers for roles that used to be performed at the main office location. Since the year-end reports should reflect all pay and taxes — including state and local taxes — it's crucial that each employee's tax jurisdiction is an accurate reflection of where they are actually living and working.

Crowley speaks to this directly: "Most everybody is trying to address what I call the great realignment of workers that are wanting to work at home. Employees can work anywhere now: at home, at their vacation home, etc. Their work location can change frequently as they move about. And interestingly, I found out from a survey that many employers do not know where all their employees are really working. This obviously creates significant problems for the employer if you have requirements in that jurisdiction. Be sure that you're reviewing the withholding requirements for employees working in other states."

The shift to remote work greatly impacts year-end payroll reporting in the sense that all the correct state setups must be in place and reflected accurately prior to year-end payroll reports being generated. This could be a significant challenge for organizations that have recently shifted to more remote employees, especially if they do not know where their employees reside. Specific efforts to confirm all employees' locations should be made prior to the end of the year. This will help ensure that year-end reporting accurately reflects the correct state and local tax withholdings, which are directly connected to the bottom line.

The wrap-up

Getting a head start on year-end payroll reporting can put you and your organization at an advantage when it comes to moving into the next fiscal year. Having employees check personal information as well as review wage recordings can set you up for an easy and smooth year-end season without the headache of corrections.

Did you know?

ADP offers an on-demand webinar that covers tips and tricks for surviving year-end reporting. Get a head start by launching it here: Strategies for surviving year-end reporting.

Dive deeper: Read more on year-end reporting