Steps for Reconciling IRS Form 941 to Payroll

Most employers must report employees’ wages paid and taxes withheld plus their own share of certain payroll taxes quarterly to the IRS. Additionally, employers must report each employee’s wages and taxes annually, on Form W-2, to the Social Security Administration. Employers use Form 941, Employer’s Quarterly Federal Tax Return, to report income taxes, Social Security tax or Medicare tax withheld from employees’ paychecks and to pay their portion of Social Security or Medicare tax.

In the end, the information on your quarterly 941s must match your submitted Form W-2s. By reconciling your 941 forms with your payroll, you can verify the accuracy of these filings. For best results, reconciliation should be done on a quarterly and a year-end basis.

Quarterly 941 Reconciliation

Step 1: Run a payroll register for the quarter. The register should show wages and deductions for each employee during that quarter.

Step 2: Compare the data on the payroll register with your 941 for the quarterly period. Areas to check are:

  • Number of employees who received wages, tips or other compensation.
  • Total compensation paid to employees.
  • Federal income tax withheld from employees’ wages.
  • Taxable Social Security wages and tips.
  • Taxable Medicare wages and tips.
  • Total tax payments made for the quarter, including federal income tax, Social Security tax and Medicare tax withheld from employees’ wages plus your own share of Social Security and Medicare taxes.

Step 3: Fix discrepancies as soon as you find them. For example, you might need to correct the employee’s wages and taxes in your payroll system and file an amended Form 941 for the quarter with the IRS.

Year-End 941 Reconciliation

Step 1: Run a report that shows annual payroll amounts. Compare those figures with the totals reported on all four 941s for the year.

Step 2: Make sure the amounts reported on all the 941s for the year match the respective data fields for your W-2 forms.

For example:

  • For compensation, compare Line 2 of all your 941s with Box 1 of your W-2s.
  • For federal income tax withheld, compare Line 3 of all your 941s with Box 2 of your W-2s.
  • For Social Security wages, compare Line 5a Column 1 of all your 941s with Box 3 of your W-2s.
  • For Social Security tips, compare Line 5b Column 1 of your 941s with Box 7 of your W-2s.
  • For Medicare wages, compare Line 5c Column 1 of your 941s with Box 5 of your W-2s.

Also, make sure your total Social Security and Medicare taxes for the year are correct.

Step 3: Perform the necessary adjustments. For example, you may need to file a corrected W-2 form with the SSA and/or an amended 941 with the IRS.

As you can see, this form can get complicated, so it’s a good idea to get professional help with it. Payroll Dynamics is glad to help and handle all of this for you!

We look forward to hearing from you soon

631-435-8700

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SSN No-Match Letters: What to Do If You Receive One

In 1993, the Social Security Administration started issuing no-match letters to employers. However, in 2012, the SSA stopped sending no-match letters to employers, due to various litigation concerns. Quite recently, the agency resurrected the practice, distributing around 575,000 no-match letters since March 2019.

Also called employer correction requests, no-match letters inform employers of discrepancies between an employee’s Social Security number and the information in the SSA’s database. The problem could be as innocuous as a typographical error or name change, or as grave as identity fraud. 

A no-match letter is basically a warning to the employer to check — and if necessary, correct — the employee’s information. It’s vital that employees’ Social Security records are correct, because the data is used to determine Social Security eligibility and the amount that should be paid.

If you receive a no-match letter, proceed with caution. 
Do not make any assumptions as to the reason for the SSN mismatch. According to the SSA, the no-match letter does not suggest that you or the employee deliberately provided the government with inaccurate information regarding the employee’s name or SSN. Further, the letter does not serve as proof that the employee is an unauthorized or undocumented worker.

Employers should not take any adverse action against an employee — such as firing, suspension, laying off or discrimination — simply because they receive the no-match letter. For example, firing an employee based on a no-match letter alone could result in the employee suing the employer for citizenship discrimination, according to the Society for Human Resource Management.

Below are three tips for handling no-match letters. 

1. Verify that the name and SSN on the employee’s Form W-2, Wage and Tax Statement, matches the employee’s personnel records. If the W-2 information was misreported, notify the SSA by following the instructions in the no-match letter.

2. Notify the employee of the mismatch if he or she needs to take some type of action. The SSA has a sample letter on its website that employers can give to employees in these cases. The sample letter should address the following:

  • The name and SSN you have on record for the employee.
  • If the record is incorrect, ask the employee to provide you with the right information.
  • If the record is correct, advise the employee to contact his or her local Social Security office and inform you of any changes once the issue is resolved.

Note that you cannot require the employee to show you his or her Social Security card — unless the employee chose to use his/her Social Security card for Form I-9 (employment authorization) purposes.

3. Give the employee a reasonable amount of time to rectify the problem. There’s no law defining what constitutes “reasonable,” so this is a gray area. Some industry experts recommend between 30 and 60 days; others advise 120 days.

If the employee fails to respond to your written notice or cannot resolve the issue with the SSA, defer to legal expertise on what to do next.

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Offering Cash in Lieu of Benefits: Is It Legal?

Group health insurance can be expensive. To lower costs, some employers offer cash in lieu of benefits to employees who opt out of their group health plan. This can be an enticing option for employers on a tight budget and for employees wanting to decrease their health care expenses.

Although it is legal to offer cash in lieu of benefits, employers must adhere to specific laws to ensure compliance. This includes Section 125 of the Internal Revenue Code, the Affordable Care Act and the Fair Labor Standards Act.

Section 125 of the Internal Revenue Code
Cash in lieu of benefits can be offered to employees only through a Section 125, or cafeteria, plan, which delivers tax savings through nontaxable benefits.

Cash payments made in lieu of benefits are taxable, so they cannot be the only option offered under the cafeteria plan. (Employees must be allowed to choose between taxable and nontaxable benefits.) Also, the cash-in-lieu-of-benefits amount should be a set figure that is consistently offered to all eligible employees.

Since cash-in-lieu-of-benefits payments are taxable, they must be included in the recipient’s W-2 taxable wages.

The Affordable Care Act
If you’re an applicable large employer, your group health plan must satisfy the ACA’s “affordability” standard, which is 9.78% for 2020. This means that for the 2020 plan year, an employee’s share for self-only coverage cannot exceed 9.78% of his or her household income.

As an ALE, you can offer “opt out” cash payments to employees who decline group health coverage, but these opt-out payments must be included in your “affordability” calculation —unless the arrangement is considered an “eligible opt-out arrangement.”

With an eligible opt-out arrangement, the employee must decline your health insurance and show that he or she has minimum essential coverage through another source, such as the employee’s spouse’s or a parent’s employer-sponsored plan. These opt-out payments do not have to be included in your affordability calculation.

Note that the employer-shared responsibility provisions of the ACA forbid employers from paying for employees’ health insurance directly — and opt-out cash amounts are considered direct payments. As a precautionary measure, state in your cafeteria plan documents and enrollment materials that cash payments made in lieu of benefits should not be used to buy individual health insurance, either on or off the health insurance marketplace.

The Fair Labor Standards Act
Employers that offer cash in lieu of benefits should be very careful in terms of the FLSA, because courts have ruled that such payments must be included in overtime calculations.

In the case of Flores v. City of San Gabriel, on June 2, 2016, the 9th U.S. Circuit Court of Appeals held that employers must include cash-in-lieu-of-benefits payments in the regular rate of pay when calculating overtime under the FLSA. On May 15, 2017, the Supreme Court rejected the city’s petition for review of the 9th Circuit’s decision — effectively keeping the 9th Circuit’s ruling intact.

The implications of cash in lieu of benefits are sweeping and complex, so seek expert advice before adopting this compensation alternative.

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Know the Tax Rules for Employee Loans

A salary, or wage, advance is a type of short-term loan from an employer to an employee. The employee receiving the advance must pay back the money within a specified time frame, as dictated by the company’s salary advance policy.

Under federal law, employers can make payroll deductions for salary advances even if the transaction causes the employee’s pay to drop below the minimum wage. Many states follow this precedent as well.

No taxes should come out of the actual advance, but you must withhold taxes from the repayment. This way, the employees’ wages will be taxed as normal.

For instance, an employee who earns taxable wages of $1,200 biweekly takes a salary advance of $200. When deducting the repayment from the employee’s next paycheck, withhold federal income tax, Social Security tax, Medicare tax, and any state and local income taxes from the $1,200. Then deduct the salary advance of $200.

Draws against commissions

A draw against commission is essentially a payment advance to a commissioned sales employee. Draws can be recoverable or nonrecoverable.

With a recoverable draw, the employee receives a fixed amount of money in advance and agrees that the draw will be deducted from his or her future commissions. These types of draws are based on a predetermined amount that is paid out regularly.

For instance, a salesperson — whose commissions are paid at the end of the month — receives a draw of $1,000 biweekly. At the end of the month, you would subtract $2,000 in draws from the employee’s commissions and then pay the employee the difference. In the end, all draws taken must be paid back.

With a nonrecoverable draw, the commissioned employee gets a guaranteed periodic amount that the employee repays if the commissions for the pay period exceed the draw amount. If the employee does not earn enough commissions to cover the draw, the employee owes the employer nothing.

If you offer draws against commission, you will need to ensure that the policy complies with the minimum wage requirements. Also, the IRS considers commissions as supplemental wages, which are taxed differently than regular wages. Your payroll provider or CPA can help you navigate the complexities of withholding taxes on draws against commissions.

Compensation-related loans

If a loan from an employer to an employee exceeds $10,000 and is given at a below-market interest rate, then the loan is “compensation related.” This type of loan is usually extended by employers who want to attract and retain key executives and employees.

The difference between what you charged the employee in interest and the applicable federal interest rate is treated as taxable wages paid to the employee and must be reported to the IRS as additional compensation.

No matter which loan structure you choose, be sure to seek legal or financial counsel so that sound policies and procedures can be established.

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Learn the Ins and Outs of Payroll Deductions

The rules for withholding federal payroll taxes are quite straightforward, applying to most employees in the United States, regardless of location. The rules tend to be more complicated on the state side, however, as they are location specific and may even include local tax withholding. Here’s a rundown of the various federal, state, and local withholding taxes.

Federal Income Tax

The Internal Revenue Service (IRS) administers federal income tax, which employers are supposed to withhold from their employees’ taxable wages. Generally, taxable wages are calculated by subtracting employees’ pretax and nontaxable payroll deductions from their gross wages.

Federal income tax withholding is based on the withholding conditions the employee states on his or her W-4 form, the employee’s taxable wages, and the IRS tax withholding table that matches the employee’s situation.

Social Security and Medicare Taxes

The Federal Insurance Contributions Act (FICA) regulates the collection of Social Security and Medicare taxes. For 2019, employers must withhold Social Security tax at 6.2 percent, up to the annual taxable wage limit of $132,900, plus Medicare tax at 1.45 percent. (For 2020, the limit goes up to $137,700.) Medicare tax does not have an annual taxable wage limit and therefore must come out of all taxable wages.

Employees who earn more than $200,000 for the year are subject to an additional Medicare tax withholding of 0.9 percent on the excess amount. (Thresholds may vary based on filing status.)

State Income Tax

The following nine states do not require state income tax withholding. (Note, however, that some of these states may tax income from non-wage sources.)

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

In all other states, employers must take state income tax out of their employees’ taxable wages according to the rules of the state revenue agency.

Many states adopt a withholding model that is similar to the federal income tax withholding. The employer, however, must refer to the employee’s state withholding form and the state tax withholding tables. A few states, such as Pennsylvania and Alaska, require withholding based on a percentage of each employee’s taxable wages.

Local Income Tax

Some local governments within certain states impose local income tax on employees who live or work in the district. These taxes—which may appear as school district, city, and county taxes—should be withheld according to the specifications of the local tax assessor or state revenue agency. Certain localities in states, such as New York, Ohio, Pennsylvania, Maryland, Alabama, and Indiana, all require local income tax withholding.

Additional State-Based Withholding Taxes

In addition to state and local income tax, employers may need to withhold other types of state taxes besides state and local income taxes. In California, employers must withhold not only state income tax but also state disability insurance. The rules in New Jersey are even more extensive, requiring that employers withhold for state unemployment insurance, workforce development, state disability insurance, and family leave insurance.

Still not clear on your responsibilities? Call us today for additional guidance on payroll tax withholding!

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3 Signs It’s Time to Update Your Benefits Technology

According to a 2018 report by the Harvard Business Review, 51 percent of survey respondents said that outdated or insufficient technology is obstructing their ability to retain top talent. Further, 58 percent said that a company’s technology is a factor for job candidates when deciding where they want to work.

This report highlights the direct link between workplace technology — which includes benefits platforms — and employee attraction and retention. But how can you tell whether your benefits technology is holding you back? Below are three signs.

1. You’re spending too much time on manual processes.

This is most likely to happen if your HR/benefits and payroll systems aren’t integrated. These two functions work in tandem, and separating them only amplifies manual labor for your HR and payroll staff.

When both technologies are not integrated, employee benefits information must be entered separately into each one. This can lead to all sorts of complications, including increased data entry errors, delays in communication between HR and payroll, limited reporting capabilities, frustration among your HR and payroll staff, and regulatory noncompliance.

Also, don’t underestimate the price tag of manual processes. In a 2018 report, Ernst & Young estimated the total labor and nonlabor costs of completing certain HR tasks, including benefits administration. The report concluded that employers can reap significant cost savings by using a fully automated human capital management system that includes self-service and benefits enrollment.

2. Your benefits technology does not have self-service.

As stated earlier, self-service HR technology can lead to major cost savings. In addition, it plays a critical role in delivering a positive candidate and employee experience. Not only does it save your HR and payroll staff tons of time, it also promotes employee engagement and autonomy.

People today demand immediate access to information, and through technology, they’re able to retrieve it. This demand is also embedded in the workplace; therefore, employees are notempowered by having to contact their HR and payroll departments for every related bit of information they need.

Because employees’ benefits are intricately woven into their personal lives, they want to feel as though they have some control over the selection and data retrieval processes.

3. Benefits enrollment and open enrollment are a drag.

The Ernst & Young report notes that the area with the most potential for cost savings is benefits enrollment. This is especially true when it comes to giving employees information about their plan and data for comparing their benefit offerings. These two pieces of information are essential to onboarding and open enrollment.

An upgraded benefits technology can make onboarding and open enrollment less of a drag by:

  • Consolidating various benefit plans onto a single platform.
  • Facilitating personalized benefit options.
  • Simplifying communication.
  • Making it easier for employees to understand their benefit choices.

Note that if your benefits technology is outdated and you’ve expanded your benefit offerings, it could lead to a multitude of problems — including issues with enrollment and compliance.

Give Payroll Dynamics a call today to discuss how we can help upgrade your benefit technology!

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3 Tips for Helping Employees Deal With Job Stress

According to the American Institute of Stress, job stress is an epidemic whose prevalence has escalated over the past few decades. The consequences of job stress can be severe, and even fatal.

Numerous studies have shown a direct link between stress and increased rates of chronic illnesses, such as hypertension, cardiovascular disease and musculoskeletal disorders. Stress can also cause workplace injury and psychological disorders, such as burnout and depression. 

According to a 2019 report by Colonial Life, employers are aggregately losing billions weekly because of stressed employees. Damages arise from decreased productivity, absenteeism, health care spending and turnover.

You can avoid these losses by alleviating job stress. Below are three tips.

Tip No. 1: Know the causes and symptoms.

Studies show that job stress is often caused by:

  • Heavy workload.
  • Unrealistic manager expectations.
  • Strained relationships with co-workers.
  • Problems balancing work and personal responsibilities.
  • Lack of job security.
  • Low salaries.
  • Insufficient opportunities for advancement.

Warning signs of job stress include:

  • Loss of confidence.
  • Reduction in work quality.
  • Anger, frustration or irritability.
  • Social withdrawal.
  • Trouble concentrating.
  • Apathy or disengagement.
  • Trouble learning.
  • Using tobacco, alcohol or drugs to cope.

Tip No. 2: Champion open communication.

According to SHRM, “A high degree of work-related stress arises from the fact that employees find it difficult to communicate or speak about it.”

Consequently, you must develop safe communication channels for employees to
report workplace stress. Let employees know that it’s okay to speak with their managers
about the issues they are facing. Managers should be receptive to these talks. They should
also know how to handle employees who are reluctant to discuss being stressed at work.

Tip No. 3: Aim to snuff out the root causes.

This requires knowing the source and symptoms of the stress (Tip No. 1) and engaging in
open communication with the employee (Tip No. 2) to arrive at solutions. Often, these
solutions are probably within your grasp. As noted by SHRM, the main reasons employees
give for being stressed are related to workplace conditions that employers might be able to
improve.

Here are some possible solutions:

  • Ensure employees have the resources they need to do their work.
  • Keep workloads and deadlines realistic.
  • Offer flexible work arrangements.
  • Adopt a wellness program that includes stress management.
  • Support employees’ need to take a vacation.
  • Make sure employees take their rest and meal breaks.
  • Offer competitive wages and benefits.
  • Train employees on how to effectively manage their time and prioritize their workload.
  • Remain vigilant about spotting and managing employee stress.

Ultimately, the goal is to pursue measures that are likely to promote a happier, healthier and more productive workforce.

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