A new year is dawning, and with the rollout of COVID vaccines, one we hope will see the end of lockdowns and a return to semi-normal. 2020 may have been a strange year where everything was turned upside down, but one thing that hasn’t changed is the need to file payroll taxes.
Given how hard this past year has been for businesses, the last thing you want is to make a mistake on your filing. We put together a short but comprehensive year-end payroll checklist for HR and finance professionals to make sure you’re set up to start 2021 on the right foot.
What Forms Do I Need to Prepare For Employees?
Along with providing W-2 Forms to your employees so they can file their taxes, you may need to also provide any of the following forms, depending on the circumstances:
Form 1099-MISC for various types of payments
Form 1099-NEC for payments to non-employees
Form 1099-B for barter exchange income
Form 1099-DIV for dividends and distributions
Form 1099-INT for interest income
Form 1099-K for payment card and third-party network transactions
What’s New For Payroll Taxes in 2020?
Beginning this year, you need to use Form 1099-NEC to report non-employee payments, such as to independent contractors. Form 1099-MISC is only for other miscellaneous payments.
This year you must also file online if you are filing more than 250 or more of each type of annual information form. In the upcoming 2021 tax year, you must file online if you have 100 or more forms. Beyond 2021 you will need to file online if you have 10 or more forms.
End-of-Year Checklist For Payroll
What to Get Done Before December 31, 2020
1. Check That Employee Information is Correct
Before compiling your W-2 forms it’s important that you verify that all employee records are correct. This is particularly true for full legal names and their social security numbers, as you can be penalized if they are incorrect.
2. Make sure all payroll, commissions, bonus pay, etc. are recorded correctly
Make sure that all employee payments, including any retro pay or bonuses, are accurately logged.
3. Check wage, tax, and benefits
Verify employee contribution amounts and special tax deposit items have been updated and submitted, including sick pay, expense reimbursements, taxable fringe benefits, dependent care benefits, etc.
4. Calculate time off balances
Determine your employees’ remaining paid-time-off. If employees must use it before the end of the year or decided to cash out the remaining days, let them know as early as possible. Ensure you are complying with PTO payout laws for your State.
5. Run the final payroll and verify employee wages
Run your final payroll, keeping in mind that December 25th and January 1st are bank holidays. Once the payroll has been submitted, verify employee records and deductions before creating employees’ W-2.
6. Get ready to apply new tax rates for 2021
The following income tax rates apply to tax returns due in April 2022.
For tax year 2021, the top tax rate remains 37% for individual single taxpayers with incomes greater than $523,600 ($628,300 for married couples filing jointly). The other rates are:
35%, for incomes over $209,425 ($418,850 for married couples filing jointly);
32% for incomes over $164,925 ($329,850 for married couples filing jointly);
24% for incomes over $86,375 ($172,750 for married couples filing jointly);
22% for incomes over $40,525 ($81,050 for married couples filing jointly);
12% for incomes over $9,950 ($19,900 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $9,950 or less ($19,900 for married couples filing jointly).
For 2021, the combined Federal Insurance Contributions Act (FICA) tax rate for employers is 7.65%: 6.2% for Old Age, Survivors, and Disability Insurance (OASDI) and 1.45% for Hospital Insurance (HI).
The Form 940 Employer’s Annual Federal Unemployment (FUTA) tax rate is 6.0%. The tax applies to the first $7,000 you paid to each employee as wages during the year.
You will also need to seek the 2021 tax rates for the following:
State income tax
State unemployment tax (SUTA tax)
State-specific taxes (e.g., Oregon transit tax)
Local income tax
What to Get Done in The New Year Before January 31, 2021
1. Update payroll processes
Update your payroll with any updates from your employees and all new tax rates. Your accounting software will likely update Federal and State tax rates automatically, but you may need to manually update industry-specific tax rates.
2. Process all W-2 and W-3 forms
Ensure all employees have W-2s by January 31st. You also need to submit both form W-2 and Form W-3, transmittal of wage and tax statement, to the Social Security Administration by January 31st.
3. File your FUTA tax return, Federal Income, and FICA taxes
Your FUTA tax return Form 940 and fourth quarter FUTA taxes must be filed by January 31st.
Need Help Managing Your Payroll Taxes and Other Accounting Needs?
Greenough Group’s accounting services and corporate tax consulting are highly sought by both small businesses and rapid-growth tech startups alike. We help businesses streamline financial operations, manage tax liability, and reduce overhead through intelligent planning, and our hourly commitment can grow alongside your business.
GCG is the preferred accounting services firm of venture executive Tom Rowley, who has utilized GCG’s services in several of his portfolio companies: “I’ve brought GCG into my last four startups. Getting finance running smoothly, as quickly as possible, allows me to focus on building the business. Hiring GCG is one of the first things I do.”
Our reputation for accuracy, senior attention, and exceptional client service has made us one of the financial community’s most highly recommended back-office services firms. Contact us today for a free consultation and learn how we can help you focus on growing your business.