Surviving Year-End Reporting: Key Tips and Legislative Updates
Year-end payroll reporting is the process of reporting on an organization's payroll for a given year. It usually includes wages paid and tax liability for both employers and employees. A significant number of legislative changes affect businesses filings each year. Keep reading for an overview, key tips and legislative updates.
Tackling year-end payroll reporting can be stressful, especially if you don't know where to start. And that stress can compound if you're crunching numbers at 8pm on December 27th. But it doesn't have to be stressful. ADP's experts teamed up to lead an on-demand webinar, Strategies for Surviving Year-End Reporting to help you navigate this time of year. Launch the webinar to hear from:
- Charles Collins, Director of Government Affairs
- Alison Fecker, Director of Government Affairs
- Kyle Lawrence, Director of Government Affairs
- Benjamin Poor, Director of Government Affairs
For now, consider this article a mini crash course in year-end payroll reporting and a few important legislative updates.
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.
What should be included in year-end payroll reports?
You should include detailed files showing total wages, local, state and federal taxes 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
The good news is, you can usually 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.
How do I know my reports are accurate?
Since the reports are usually generated based on the data in your payroll provider platform, you'll know it's accurate so long as everything that's been inputted all year was accurate. Conversely, this means that if the pay and tax withholdings processed through the platform were incorrect, this will cause the reports the platform produces to be incorrect.
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.
This means it's important to ensure all wages and taxes 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 my remote workers affect year-end reporting?
Yes, remote workers affect year-end payroll reporting because of their unique tax jurisdictions. Year-end reports should reflect all pay and taxes allocated to the correct state and local jurisdictions and remitted to the proper authorities. All the correct state setups must be in place prior to generating year-end payroll reports. This could be a significant challenge for organizations with employees in multiple states. Effort 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.
IRA small business credit expansion
Recently, as a part of the Inflation Reduction Act, employers may now be able to claim an additional $250,000 in small business research credits against their employment tax burdens. The small business research credit was originally introduced in 2016 through the Protecting Americans from Tax Hikes (PATH) Act. Qualifying employers have been able to take up to $250,000 of this credit against their social security tax burden. Through the inflation reduction act, qualifying employers can now take an additional $250,000 of the credit against the employers Medicare taxes as well, for a total of up to $500,000 between social security and Medicare taxes. It's important to note that to claim the credit, employers first must exhaust the first $250,000 against social security taxes and can then claim an additional $250,000 against Medicare taxes. The second quarter of 2023 was the first opportunity to claim the credit based on the expansion to Medicare taxes.
"This is a great opportunity for employers to try to claim these credits against their employment burdens if they do qualify for them," says Poor. "The good news is, outside of the expansion to claim the credits on Medicare taxes, there's been no changes to credit qualification."
New e-filing mandate
An important update for the 2024 tax year is the e-filing mandate. Employers filing more than 10 tax returns in the year are now required to file electronically with the IRS. Poor says it's important to note this update pertains to the total number of returns, not the total number of return types. "Even small organizations with only a handful of employees could be required to e-file. If they have one Form 1120, six Form W-2s, and three Forms 1099s, that's 10 forms right there, and even though they only have nine workers and three form types, they're still filing 10 forms so they'll be required to e-file," says Poor.
Affordable Care Act updates
The Inflation Reduction Act extends ACA premium subsidies through 2025. Now that a higher number of individuals qualify for that coverage, there could be a risk for additional employers subject to penalties associated with not offering affordable coverage. While the affordability threshold decreased to 8.39% in 2024, it will rise to 9.02% in 2025, and employers should ensure plans offered in 2025 comply with the new threshold.
2025 federal tax limits
While Social Security tax and Medicare tax rates remain the same at 6.2% and 1.45%, respectively, the limits have changed. In 2024, the maximum taxable earnings for Social Security was $168,600, but for 2025, the maximum taxable earnings have increased to $176,100, which is a significant increase. The taxable maximum for Medicare remains unlimited with the same increase of 0.9% to be withheld on earnings above $200,000 (1.45% + 0.9% = 2.35% on wages above $200,000).
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. It's important to stay on top of legislative updates that may affect your organization, tax filings and legal reporting requirements. For more comprehensive coverage of legal updates affecting year-end reporting, launch the webinar on demand: Strategies for surviving year-end reporting.
