7 Awful End-of-Year Payroll Tax Mistakes

Check your payroll system for these common mistakes

7 Awful Payroll Tax Mistakes
7 Awful Payroll Tax Mistakes. vm/Getty Images

The end of the year is a busy time, but you need to take time for payroll tax tasks, including end-of-year reports for employees and independent contractors, and other related payroll issues. Here are some important year-end payroll and payroll tax tasks employers often miss: 

1.  Not using the right tax year 

The end-of-year payroll tax reports I'm taking about are the W-2 forms for employees and 1099-MISC forms for independent contractors.


The year of the report is the year of the tax. So, while you may be preparing these reports in January 2018, they are for 2017 wages and taxes. 

 Just as a reminder: You must give 2017 W-2 forms to employees and 1099-MISC forms to independent contractors by January 31, 2018. You must also file 2017 W-2 forms and 1099-MISC forms by January 31, 2018. The W-2 forms go to the Social Security Administration, and the 1099-MISC forms go to the IRS. 

2. Not using the correct forms for annual reports and transmission forms  

As you prepare those W-2 forms and 1099-MISC forms, be sure you have the correct version of the form. In addition to the correct tax year, mentioned above, you must use a special form. You can't just copy the form from the internet and use it. Copy A of the correct forms is printed in a special red ink and there are multiple copies, each of which goes to a specific place. 

Here's an article that discusses where to get the correct W-2 forms and 1099-MISC forms. 

3. Not getting verification forms from employees and independent contractors

Before you prepare those W-2 forms for employees and 1099-MISC forms for independent contractors, you must have a verification form from each one.

  • At hire, you must have the new employee sign a W-4 form that gives information about the employee, including information on federal income tax withholding. This form should be updated periodically to be sure it's correct. 

4. Not including taxable benefits on W-2 Forms 

When you prepare W-2 forms for employees, don't forget about those taxable benefits that must be reported. These benefits include employee gifts and bonuses, and employee use of cell phones. 

5. Not considering additional Medicare tax and Social Security maximums  

When you review your payroll procedures, make sure you have withheld the correct amounts for Social Security and Medicare. 

  • Social Security withholding stops for employees when they reach the annual maximum withholding, which changes each year. Social Security still must be paid by employers on all income for the year, and there is no employee maximum on Medicare withholding.
  • An additional Medicare tax is required for higher earning employees. Employers are required to withhold additional Medicare tax, above the 1.45% Medicare tax rate, at a rate of 0.9% on Medicare wages in excess of $200,000 paid to an employee. 

6. Not sending forms to the correct federal agency

It's confusing, I know, trying to remember which federal agency receives which end-of-year reports.

Here are the details: 

  • Forms for employees, including W-2 forms and W-3 forms and electronic transmittals, go to the Social Security Administration. Check with the Social Security for information and to sign up for online filing. 
  • Forms for non-employees, including 1099-MISC forms for independent contractors and 1096 transmittal forms, go to the IRS.  Here is a step-by-step guide to preparing and filing 1099-MIISC forms. 

7. Not considering your state taxing authority

For states that have income tax, you must also comply with requirements for state W-4 forms, withholding state income tax from employee pay, reporting amounts withheld, and transmitting amounts according to your state's timeline. Check your state's department of revenue or taxing site for more information.