Taxes on year-end employee paychecks can get confusing. If you pay your staff on January 4, 2019, for work done the last week of December 2018, is that amount taxable in the year of the work or the year of the paycheck? Learn how to determine which tax year end-of-year employee paychecks should be in.
Paycheck Date Rules
In most cases, even if the work was done and pay earned in a different year, the paycheck date rules. For instance, if the paycheck was dated and available to employees in January 2019 but not December 2018, the gross pay is taxable in 2019. In contrast, if the paycheck was dated and available to employees in December 2018, the pay is taxable in 2018 whether or not the employee received the check.
If a paycheck is made available to an employee before the end of the year, such as through direct deposit, the pay is taxable in that year. This rule applies even if the check stub is dated in the following year. Because the IRS considers constructive receipt to be when the employee has their paycheck and can control it, the income is taxable that year. Keep in mind that if an employee receives a check in the mail postdated for the following year, the check is not cashable until the date. As a result, the income would be taxable the following year.
Constructive Receipt and W-2 Forms
Constructive receipt affects the information you provide employees on W-2 Forms about their pay and amounts withheld for federal income taxes, social security and Medicare. The last paycheck dated in December is included in that year’s W-2 earnings. The first paycheck in January is included in the new year’s W-2 earnings. After you prepare those forms, you must send them to your employees and the Social Security Administration by January 31. Be sure you properly account for the last paycheck of the year to withhold and report the proper amount of taxes.
Importance of Paycheck Year
The year a paycheck is dated affects the employee’s taxable income. For instance, if a pay period ends before the start of the new year, a few days in the previous year will be paid in the next year. If the pay period ends after the end of the year, there will be additional days in the next year’s pay. This is important if an employee received a significant year-end bonus, for example, as it may affect their tax rate. Also, if the year had an additional pay period, employees may appear to receive an extra paycheck. Letting staff know about the difference before paying them allows time for employees to alter their W-4 and increase withholding from that paycheck.