PAA LEHIGH VALLEY CFO FORUM: Year-End Payroll Processing


  • What to File
    • W-2 issued when employer/employee relationship exists
    • 1099 issued to independent contractors paid over $600 during calendar year
  • IRS has issued guidance to determine whether an employment relationship exists.
    • Factors to be considered:
      • Instructions
      • Training
      • Integration
      • Services rendered personally
      • Hiring, supervising and paying assistants
      • Continuing relationship
      • Set hours of work
      • Full-time required
      • Work performed at employer’s place of business
      • Order or sequence set
      • Oral or written reports
      • Payment by hour, week, month
      • Payment of business and/or traveling expenses
      • Furnishing of tools or materials
      • Significant investment
      • Realization of profit or loss
      • Working for more than one firm at a time
      • Making service available to general public
      • Right to discharge
      • Right to terminate
      • Other factor


  • IRS Reclassification
    • Frequently asked questions when IRS reclassifies workers as employees
      • What should I do now?
      • How do I figure my liability for FICA tax and federal withholding?
      • Do I qualify for any type of reduced tax rates, and if so, what are these rates?
      • What are the reduced rates under Section 3509?
      • What do I do about Form 941?
      • What do I do about Forms W-2

DEMONSTRATORS Rev. Proc. 2001-56 

  • What is the purpose of the Revenue Procedure?
    • Provides optional simplified methods for determining the value of the use of Demonstration Vehicles.
  • What is the effective date?
    • January 1, 2002
  • The Methods Include:
    • Simplified Method for the Full Exclusion of Qualified Automobile Demonstration Use
    • Simplified Partial Exclusion Method
    • Simplified Inclusion Method
  • Who may use the Simplified Methods?
    • Available to any Automobile Dealer engaged in the business of Retail Sales of New or Used Vehicles
  • What Vehicles Qualify as Demos?
    • Vehicles currently in inventory and available for test drives by customers during the normal business hours.
  • Which employees qualify for the simplified Methods?
    • Limited to use by Full-Time Salespeople.
  • Does new Rev. Proc. Describe all methods available?
    • No - a dealer may use any other method that complies with the Internal Revenue Code
  • Simplified Full Exclusion
    • Use of vehicle in Sales Area
    • Employer must have a qualified written policy
      • Substantial restrictions on personal use
      • Use limited to salesperson (ie spouse not allowed)
      • Use of personal vacation trips prohibited
      • Storage of personal possessions is prohibited
    • Employer must reasonably believe that sales person is complying with written policy
    • Use outside normal working hours is limited to commuting plus an average of 10 miles per day on a monthly basis.
    • Mileage records must be maintained such as recording the mileage at the time of arrival and departure at the sales office each day. Some verification is necessary
  • Simplified Partial Inclusion Method
    • Written Policy required
    • Prohibited use includes personal vacations, storage of personal possessions and use by anyone other than the full-time salesperson
    • Unlimited miles
    • No record keeping requirement
    • Salesperson taxed on $6 per day for vehicles valued at $15,000 - $30,000 (determined on the dealership average sales price basis).
    • Can be used for any month a full-time salesperson does not qualify for the simplified exclusion method
    • Can be used for any month a full-time salesperson does not qualify for the simplified full or partial exclusion methods.
    • Simplified method of determining value of demo used by employee (dealership average sales price basis).
    • Must be used on a monthly basis.
  • Summary of Methods available for full-time salespersons
    • Full exclusion
      • Keep records, limit personal use to commuting plus 10 miles per day and other restrictions apply. Taxable amount-zero
    • Partial exclusion
      • No records, no mileage limit to personal use, some other restrictions. Taxable amount - about $6 per day.
    • Inclusion Method
      • Available if does not qualify for Full or Partial Inclusion Method. Taxable amount - simplified method of determining value of demo used by employee
    • Commuting and de minimis
      • No record keeping if the employer reasonably believed that there was no personal use except for de minimis and no amount would be includible in income for the value of commuting (may have to maintain some evidence of this). Taxable amount-Zero
  • Method available for all dealership employees:
    • Full inclusion at annual lease value amount based on average dealership vehicle sales price, no record keeping. Taxable amount-$17 per day average.


  • Premiums for coverage over $50,000
  • Amount of such “excess” premiums must be reported through payroll
  • Non-taxable jurisdictions
    • Federal unemployment
    • PA income tax
    • PA unemployment tax
    • NJ unemployment tax


  • What is reportable?
    • Taxable AND 
    • Non-taxable sick pay made to employees from a third party
  • W-2 Requirements
    • Sick pay MUST be included on the employees’ W-2 or on a separate form provided by the third party
  • Non-taxable jurisdiction determination
    • First six months
      • New Jersey income tax
      • New Jersey unemployment tax
      • Delaware unemployment tax
    • After six months
      • PA unemployment tax
      • New Jersey unemployment tax
      • Delaware unemployment tax
      • Social Security and Medicare
      • Federal Unemployment


  • Shareholders of an S-Corp may not participate in Section 125 plans (cafeteria plans)
  • Medical insurance premiums paid by the employer on behalf of >2% shareholder are taxable to the shareholder
  • Non-taxable jurisdictions
    • Social security tax
    • Medicare tax
    • Federal unemployment tax
    • PA income tax
    • PA unemployment tax
    • Philadelphia wage tax
    • New Jersey income tax
    • New Jersey unemployment tax
    • Delaware unemployment tax


  • Plan under which certain qualified benefits, paid for by the employees are not taxable under certain jurisdictions
  • Non-taxable jurisdictions
    • Federal
    • Social security tax
    • Medicare tax
    • Federal unemployment tax
    • PA income tax
    • Delaware income tax
  • Must have a formal plan in place
  • Employees must agree to pay for their benefits under the plan
  • Form 5500 must be filed annually for the plan (due seven months after the end of the plan year)

401(k) PLAN 

  • Maximum amounts that an employee can defer per federal regulations
    • $15,500
  • Refer to plan documents for restrictions
  • Non-taxable jurisdictions
    • Federal income tax
    • New Jersey income tax
    • Delaware income tax
  • Employees must authorize salary deferrals
  • Form 5500 must be filed annually for the plan (due seven months after the end of the plan year)


  • Issue
    • Are amounts paid to technicians as reimbursements for the use of the technicians’ tools paid under an accountable plan?
  • IRS conclusion
    • Effective date - July 21, 2000 
    • Generally, amounts paid to technicians as tool reimbursements will not meet the accountable plan requirements. Therefore, amounts paid under a non-accountable plan are included in the employee’s gross income, must be reported to the employee on Form W-2 and are subject to the withholding and payment of federal employment taxes.
  • Corrective procedures
    • Do not exclude for 2001


  • Due date to workers/independent contractors
  • Due date to federal government
  • Penalty for failure to file
    • $50 per return (non-filing or filed after August 1)
    • Maximum penalty $250,000 per year
  • Penalties also apply if:
    • File on paper when you should have filed on magnetic media ( >250 forms)
    • You report on incorrect taxpayer ID
    • You fail to report a taxpayer ID
    • You fail to use forms that are machine readable
  • Use your computer system to accumulate data
  • Use your computer system to print returns
  • ADP
    • Set up all unincorporated vendors to have computer accumulate and print 1099’s
    • Use ADV function to properly set up vendors
    • Make sure that all “on demand” checks are coded as “Type 2” - vendor for proper accumulation
    • Run 1099 report
    • Check amounts to vendor files
    • Correct any errors
    • Re-run 1099 report
    • Print 1099’s
  • Reynolds & Reynolds
    • Utilize Function O551 to set-up unincorporated vendors and change vendors to collect data for 1099 purposes
    • Utilize Function 0794 to run the 1099 balance report and check amounts to vendor files
    • Utilize Function 0792 to adjust 1099 balances and correct any errors
    • Utilize Function 0794 to re-run 1099 balance report
    • Utilize Function 0414 to print 1099 forms


  • Getting this amount?
    • This should be calculated by the shareholder’s CPA
  • Why are we paying the federal withholding at year end?
    • Withholding is pro-rated as if paid evenly throughout the year
    • Think time value of money
  • Example - $1,000,000 due in the year
    • If estimates paid, payments paid on . . .
      April 15 $ 250,000
      June 15 250,000
      September 15 250,000
      January 15         250,000 
  • Example - $1,000,000 due in the year (continued)
    • If paid $1,000,000 through withholding at December 30th
    • Interest at 8.5% on money kept until December 30th . . . $17,000
  • Remember . . . .
    • Federal tax liabilities in excess of $100,000 must be deposited by the NEXT banking day after the check date.


  • Determination status
    • Based on annual determination
  • Types of status
  • Monthly
    • If aggregate amount reported for lookback period is $50,000 or less
  • Semi-weekly
    • If aggregate amount reported for lookback period is $50,000 or more
  • Lookback period
    • Lookback period for each calendar year is twelve month period ended the preceding June 30th.
  • Deposit dates
    • Monthly rule
      • Must deposit employment taxes on or before the 15th day of the following month
    • Semi-weekly rule
      Payment Dates  Deposit Date 
      Wednesday, Thursday and/or Friday On or before the following Wednesday
      Saturday, Sunday, Monday and/or Tuesday On or before the following Friday
    • One day rule
      • If on any day within a deposit period an employer has accumulated $100,000 or more of employment taxes, those taxes must be deposited by the close of the next banking day.
  • Tax deposits by electronic funds transfer
    • Aggregate annual taxes exceed $200,000
  • Penalties and interest
    2% Deposits made 1 to 5 days late
    5% Deposits made 6 to 15 days late
    10% Deposits made 16 or more days late
    10% Amounts paid within 10 days of first notice the IRS sent asking for the tax due
    15% Amounts unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due
    10% Deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with your return
    10% Amounts subject to electronic deposit requirements but not deposited using the Electronic Federal Tax Payment System (EFTPS)


  • LLP
  • LP
    • Forms of partnerships
  • LLC
    • Members are treated like partners in partnerships


  • Payments to partners do not go on form W-2
  • Payments to partners do not get reported on quarterly payroll tax returns
  • All taxes are paid by the individual through their personal tax return
  • What do you do?
  • Follow the partnership agreement
  • Payments will take on different characteristics
    • Guaranteed payments
    • Draws
  • Personal use of company auto
  • Medical insurance premiums
  • 401K contributions
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