1. Double-check you’ve entered into your system items such as group-term life insurance, personal use of company cars, educational assistance, YTD corrections and manual checks.

Why: If you don’t enter these adjustments for processing during the last regular payroll run, you may not withhold any applicable taxes. (And who wants to fix those errors?)

2. Check paper W-2s when they arrive (if you’re printing in-house and haven’t already) to make sure employee instructions meet IRS’ requirements. Double-check that the Earned Income Credit Notification appears on the back of Copy B or C.

Why: You won’t be scrambling to get your vendor to send new forms (or print them yourself) at the 11th hour. IRS requires employers to give workers this notification, and printing on the reverse side of the W-2 is usually the easiest and most cost-effective measure.

3. Inform the mailroom of when you plan to mail W-2s.

Why: Staff there will need to know what to do with undeliverable or returned forms. Plus, if you’re mailing in-house, you’ll ensure there’s enough postage available on your mail date.

4. Design and print a report listing employees with no Social Security Number or address, so you can investigate and make corrections.

Why: You may face no-match letters or other compliance problems if you don’t clear up problems.

5. Ask your Accounts Payable people about payments made to employees that require W-2 reporting (e.g., nonaccountable plan reimbursements, taxable company-paid travel such as management retreats, etc.).

Why: These amounts may require income and employment tax withholding when processed, or even gross-up if your employer’s paying the employee’s taxes.

Source: American Payroll Association’s “Preparing for Year-End” seminar.

It’s likely some version of the newest healthcare reform proposal to come out of Washington will not only become law, but also change the way you do your job — as early as Jan. 1 — particularly in five areas.

The Senate Finance Committee just released its 10-year, $856-billion proposal, which would extend health coverage to 29 million uninsured Americans.

The package, authored by Chair Max Baucus (D-MT) and referred to as a “Chairman’s Mark” because there’s no legislative language drafted yet, is considered a compilation of the most popular (i.e., effective, but conservative and least expensive) ideas presented thus far. It’s likely that some version of this plan will pass after the typical party revisions and compromises.

Here are some key stipulations and  proposed effective dates where appropriate:

1. Additional information reporting duties. Under current law, Payroll isn’t required to report the value of employer-provided health insurance benefits to IRS on the Form W-2. However, some employers voluntarily report in Box 14 the salary reduction amount under a cafeteria plan resulting in tax-free employee benefits.

The Mark proposes requiring companies to report on the W-2 the value of the employer-provided benefit for each person’s health insurance

If someone received coverage under multiple plans (e.g., medical, dental, vision), Payroll would report the aggregate value. Generally, use the same value for all similarly situated employees with the same category of coverage (e.g., single or family health insurance).

Effective: first taxable year after 12/31/09.

2. More payroll deductions. The proposal creates a refundable tax credit for eligible individuals and families who purchase health insurance through proposed new state cooperatives (i.e., “exchanges”). Those opting for this coverage would pay premiums through payroll deductions.

There’d be a fall enrollment period, during which applicants would have to provide info from their previous year’s tax return to qualify for coverage during the next calendar year.

Employers who don’t offer such coverage will have to repay the credit amounts. The assessment may be capped at $400 per worker (all workers, not just those who qualify for tax credits). Note that employees who are offered affordable coverage through their employer can’t get the tax credit – so in those cases, the employer assessment shouldn’t apply.

Illegal immigrants wouldn’t be eligible for the credit. To prevent them from participating, personal data (i.e., name, Social Security Number and date of birth) would have to be verified against SSA’s database. Those in the U.S. legally but whose status is expected to expire in less than a year aren’t allowed to take the credit.

Effective: not specified.

3. Stricter reimbursement rules for qualified medical expenses. The Mark proposes no longer allowing the cost of over-the-counter (OTC) medicines (except those prescribed by a doctor) to be reimbursed through a health flexible spending account or health reimbursement account. In addition, the cost of these medicines couldn’t be reimbursed on a tax-free basis through a health spending account or an Archer medical spending account.

Effective: taxable years beginning after 12/31/09.

4. Creation of a Simple Cafeteria Plan. This change eases the participation restrictions, allowing more small businesses to offer tax-free benefits to employees. The proposal exempts employers who make contributions for employees under a simple cafeteria plan from pension plan nondiscrimination requirements applicable to highly compensated and key employees.

The safe harbor also applies to the nondiscrimination requirements for specific qualified benefits offered under the cafeteria plan, including group term life insurance, coverage under a self-insured group health plan and benefits under a dependent care assistance program.

This provision would apply to employers with an average of 100 or fewer employees during either of the two preceding years.

Effective: taxable years beginning after 12/31/10.

5. Loosening of long-term care insurance restrictions. Under current law, employees participating in a cafeteria plan can’t pay premiums for long-term care insurance not otherwise paid for by their employers on a pre-tax basis through salary reduction. That’s because any product advertised, marketed and offered as long-term care is a nonqualified benefit specifically not permitted under a cafeteria plan.

The Chairman’s Mark, however, would allow reimbursement for employee-paid premiums for a qualified long-term care insurance contract through a flexible spending arrangement (whether or not under a cafeteria plan) and therefore be excluded from gross income.

Effective: taxable years beginning after 12/31/10.

The reason: Fraudulent income tax returns and and annual wage reports are costing the federal and state treasuries millions annually.

In theory, more frequent reporting would allow the IRS and states to match wage and withholding data to workers’ tax returns – a difficult, if not impossible, task right now.

Think about it: Companies submit W-2s to SSA and the states mid-tax season. So, by the time their file arrives at the agency, identity thieves have had weeks to create false W-2s and tax refund requests – plenty of time to file, collect and spend a fraudulent tax refund.

Two problems with the current structure:

• Even states with updated processing technology don’t have time to cross-check the data before the tax season begins, and
• Many states require electronic filing, but not all do. Specifically, about 63% of states with income taxes require electronic W-2 filing.

States have been including ever-smaller employers under such mandates, but these numbers still leave a lot of room for paper filing.

For this proposal to work, far more employers would have to e-file their data, or the SSA would need to share electronic W-2 data sooner.

Should the idea move forward, “The Administration will work with the states so that the overall reporting burden … is not increased,” the Administration’s May 2009 Budget Overview suggests.

You’ll be able to mask all but the last four digits of Taxpayer Identification Numbers (TIN) on 1099s that go from payer to payee. In addition to a Social Security Number, the number on Forms 1099 could be an employer ID or individual taxpayer ID number (ITIN).

Employers that choose to mask the numbers on workers’ 1099s will still have to include the full nine-digit number on the copy filed with IRS.

When the change comes, TIN-masking would be optional for 2009 and beyond, Deborah Wolf, director, IRS Office of Privacy, Information Protection and Data Security told attendees of the American Payroll Association’s (APA) Capital Summit.

The idea’s not being widely embraced, however. Only 37% of respondents in a recent APA survey said they’d adopt the practice for 2009 forms. Another 37% said they would begin masking in Tax Year 2010.

Those on the other side of the coin – the 26% who don’t plan to adopt TIN-masking – fear there’ll be no other way for the payee to verify that the payer has the correct number.

What about W-2s?
Don’t count on seeing a similar option for Forms W-2 any time soon. TIN-masking on them would have to be authorized by Congress because the Internal Revenue Code is clear that all nine digits are required on the W-2, says Wolf.

Sixty-seven percent of APA survey respondents said they’d mask SSNs on the W-2s, with many others again citing fear of using incorrect numbers as the biggest drawback.

The Internal Revenue Service just let you off the hook for what could’ve been a big administrative hassle this year-end.

IRS recently announced it won’t require any information reporting (i.e., Forms W-2 or 1099) for COBRA premium assistance payments employers make on behalf of terminated employees.

There’s a tradeoff, of course. It’s likely that because you don’t have to officially inform employees of the subsidy amount, recipients will have to call you when they prepare their personal federal tax returns.

Some will have to pay back a portion of the subsidy, e.g., those with adjusted gross income of $125,000 or more; $250,000 for married taxpayers filing jointly. Assistance eligibility phases out completely for people with modified gross incomes of $145,000 or more; $290,000 for joint filers. They’ll return the subsidy amount by increasing their tax liability on the Form 1040.

To prevent your phone from ringing off the hook, consider compiling subsidy info throughout the year, as your company makes the premium payments, and issue a simple statement at year-end along with your W-2s or 1099s.

What you’ll need
The info you’ll need should be easy enough to find. As part of the COBRA subsidy program, the American Recovery and Reinvestment Act requires employers to maintain the following documentation:

• Dates and amounts of the assistance eligible individuals’ 35% share of the premium.
• A copy of the invoice or other supporting statement from the insurance carrier (when you have an insured plan) and proof of timely payment of the full premium to the insurance carrier required under COBRA.
• Proof of the (1) premium amount and (2) coverage provided to the assistance eligible individuals. (Self-insured plans only.)
• Attestation of involuntary termination, including the date of the involuntary termination (which must be between 9/1/08 and 12/31/09), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
• Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period between 9/1/08 and 12/31/09, and election of COBRA coverage.
• Social Security Numbers of all covered employees,  the amount of the subsidy reimbursed with respect to each covered employee,  and whether the subsidy was for one individual or two or more individuals.
• Other documents necessary to verify the correct amount of reimbursement. Note that although your company must maintain this documentation, you’re not required to submit it with your Form 941.

IRS and SSA have changed the format of Form W-2 to help protect workers’ privacy. To keep employees’ Social Security Numbers from showing through a window envelope, the agencies have moved:

- the “Employee’s Social Security number” (SSN) box from Box d to Box a

- “Control number” box from Box a to Box d (this is optionally used by some employers to identify individual W-2s)

- The form ID Number “22222” AND “Void” boxes to the top left corner of the form.

SSA says it’s received many paper W-2s where the SSN and/or name aren’t in the proper position – which delays processing. Before submitting paper W-2s to SSA, be sure someone reviews them, especially Copy A, to ensure printer accuracy.

Get the 2009 filing instructions here.

1. Tax consequences of company-provided vehicles: If you change the option to withhold (or not withhold) federal income tax on the value of personal use of a company vehicle, you must notify employees by: 1) 2/2/09, or 2) within 30 days after the employee received the vehicle.

2. Changes to exempt status: Let employees who claimed exempt from withholding in 2008 know that they must file a new form by 2/15/09 to remain exempt. If they don’t submit a new form, Payroll must begin withholding federal income tax as if they are single, with zero withholding allowances.

3. Wage base and other tax changes: You’ll head off a number of questions if you let your higher-ups know about the 2009 increased Social Security wage base and all federal and state tax table changes.

4. W-2 mail dates: Giving the folks who work in the mailroom a heads-up about what date you plan to mail Forms W-2 is more than a courtesy. If you’re mailing in-house, you’ll want to make sure there’s enough postage available the day you need it. If you’re outsourcing, it’ll be helpful for the mailroom to know the mail date – and what should be done with any forms that come back undeliverable.

The lifesaver year-end form
If the 11th hour comes and for some reason – the printer jams, your vendor balks, etc. – you can’t deliver your W-2s, there’s one form that can save you.

Filing Form 8809 will get you an automatic 30-day extension. The only trick is you must postmark, transmit or complete the form online by the W-2 due date. (For 2009, you have until March 2 if filing on paper and March 31 if e-filing.)

Download Form 8809, Application for Extension of Time to File Information Returns, at www.irs.gov/pub/irs-pdf/f8809.pdf.

IRS Releases 2009 Withholding Tables
Let your Payroll people know that if they use the percentage-method withholding tables, they can set their system now for the first payroll of 2009.

IRS just released Notice 1036, which shows the amounts for one withholding allowance:
Weekly ……………………………… $70.19
Biweekly …………………………. $140.38
Semimonthly …………………… $152.08
Monthly ………………………….. $304.17
Quarterly ………………………… $912.50
Semiannually ………………… $1,825.00
Annually ………………………. $3,650.00
Daily/misc. ………………………… $14.04.

The wage bracket withholding tables will appear in IRS’ Publication 15, Circular E, which hasn’t been published yet.

Many of the provisions of the act have an impact on how HR managers and their employers deal with employees on active duty. Here are the four key provisions:

Early withdrawal from 401(k), 403(b) or 457(b) Plans The new law makes permanent the exemption from the 10% early withdrawal penalty for withdrawals by reservists called to active duty for at least 180 days. A reservist is also permitted to recontribute the amount withdrawn to an individual retirement account within two years of the last day of active service.

Employment benefits for death or disability during active duty. In case of death during qualified military service, an employee must be treated as if he or she had died while actively employed (but not for purposes of benefit accruals). Many plans provide for accelerated vesting or ancillary death benefits upon death during active employment. As a result, plan administrators need to determine if this new requirement will retroactively vest any survivor benefits. This requirement applies to qualified plans, 403(b) plans and 457(b) plans.

The act also permits, but does not require, plans to treat a participant who dies or becomes disabled while performing qualified military service to be treated as if the participant had resumed employment. This will result in participants’ being credited with their time in military service for benefit accrual purposes. In addition, the act permits the employer to make up any employee contributions missed by such participants based on the participants’ actual contributions during the 12-month period immediately preceding the qualified military service.

Treatment of differential pay. Effective January 1, 2009, differential wage payments made to military personnel must be treated as W-2 wages (previously, these amounts were reported on Form 1099). As such, these payments are subject to federal income tax withholding and must be treated as compensation for determining contributions and benefits under the employer’s retirement plans.

An individual in qualified military service for more than 30 days and receiving differential pay must be treated as having a severance from employment, and therefore is eligible to receive a distribution of elective deferrals. However, if the individual takes a distribution, he or she will be barred from making elective deferrals or employee contributions for six months. This provision is effective for plan years beginning after December 31, 2008.

Health Flexible Spending Account payouts. The effective immediately, the Act allows – but doesn’t require — a healthcare flexible spending account to permit reservists called to active duty for 180 days or more to withdraw all or a portion of any unused money (notwithstanding the normal “use it or lose it” rule). The distribution of these funds must be made during the period from the date of call-up until the last day the benefits could normally be reimbursed for the plan year.