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Payroll Taxes

How to Quickly Check the Accuracy of Year-End Employee Payroll Records

December 23rd, 2015

While employee payroll reports are important chores to complete, an employer should spend some time to review and ensure the accuracy of employee payroll records at the end of the year. The key concept is to make sure the payroll records reconcile correctly meaning proper employee payroll taxes were withheld, taxes were deposited and the payroll reports reflect the payroll records accurately. Any inconsistency probably guarantees that you will receive a letter from the IRS or State some months later. No one likes to dig out the old employee payroll records and try to figure out what was wrong and how to fix it.

Here are a few simple checks when calculating payroll taxes before filing the year-end employee payroll reports, especially if you switched business payroll service in mid-year:

  1. Sum of employee payroll Form 941s = Sum of W2s (or W-3)

    The total of employee wage, income tax withheld, Social Security and Medicare taxes reported on the 4 quarterly Form 941s should equal the total of the same items on the W2s (or the total on the W-3).  However, if you filed W-2s in different batches then each batch will have its own W-3 form and you need to add them all together.
  1. Employee payroll Social Security and Medicare Tax withholding rates are correctSocial Secure Tax rate, if not exempt, is 6.2% for the employee and 6.2% matching by the employer.  Medicare Tax is 1.45% for employee and 1.45% matching by the employer.  If any employee is exempt from these taxes, the W-2 should reflect the amounts accurately and it is more important to make sure the total matches that of the Form 941s.
  1. Employee payroll wage limit for Social Security taxEach year, the employee payroll wage limit for Social Security tax increases slightly.  For 2015, an employee does not pay SS tax for income above $118,500.  Medicare tax has no wage limit and every employee pays the same percentage regardless of the wage amount.  The amount reported in box 3 of any W-2 form can’t be more than the annual wage maximum.
  1. Employee payroll wage limit for FUTA and State UIThe wage limit for Federal Unemployment tax is $7,000 while the limits for States are different for different States.
  1. Employee payroll Credit Reduction (FUTA, Form 940)Employees claim unemployment benefits from the States if they lost their jobs.  When a State does not have enough funds to cover UI claims, it borrows from the Federal Unemployment fund.  If a State exhausted its FUTA account, the Federal government will demand more money from every business in that State to replenish the account.  The additional tax is paid as Credit Reduction on Form 940 at the end of the year.  The good news is that with the improving economy and employment, just a few States are required to pay more FUTA tax for tax year 2015.

In summary, there are several business payroll reports due at the end of the year though it is more important to review and reconcile payroll records to avoid issues in the future.

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  • Timely payroll tax payments
  • Timely payroll filing and reporting

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