2023 Year-End Planning for Payroll Reporting

With year-end approaching, it’s a good time to consider ways to lower your business’s payroll-related taxes for the current tax year as well as the 2024 tax year. Consider the following actions based on current tax rules that may help your business save tax dollars if acted upon before year-end:

  • Year-end bonuses can be timed for maximum tax effect by both cash- and accrual-basis employers. Cash- basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within 2½ months after the end of the employer’s tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year-end to set the payment date later than the 2.5-month window or change the bonus plan’s terms to make the bonus amount not determinable at year end.
  • For businesses that claimed the Employee Retention Credit, a review of eligibility is strongly recommended to determine if the claim is legitimate.  Consideration should be made to possibly withdraw the claim or repay the credit to mitigate further penalties and interest that may accrue for the erroneous claim. The IRS announced a moratorium on the processing of new Employee Retention Credit (ERC) claims through December 31, 2023, in response to a surge in questionable claims resulting from aggressive ERC promoters and marketing. The ERC, now expired, was established during the height of the COVID-19 pandemic to provide relief to businesses and workers. New claims may be filed, however, the IRS will be pausing processing until at least 2024. The IRS noted that the number of fraudulent ERC claims has increased. However, for those taxpayers with legitimate claims, the ERC may be claimed for the 2020 tax periods by April 15, 2024, and for the 2021 tax periods by April 15, 2025, using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
  • Utilize the new IRIS Form 1099 Filing Portal. The Taxpayer First Act (TFA) required the IRS to develop an internet platform that will allow taxpayers to electronically file Forms 1099. The platform, the Information Returns Intake System (IRIS) was launched in January 2023. All 1099 series forms, including Form 1099-NEC used for reporting non-employee compensation, can be filed via the platform. The Filing Information Returns Electronically (FIRE) system will remain available for bulk filing of Form 1099 series and the other information returns through at least the 2023 filing season.
  • Employers may claim a general business credit for paid family and medical leave they provide to their employees. This credit has been extended through 2025. Employers that paid family and medical leave to qualifying employees may take a credit equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and may be eligible for a higher percentage credit under certain conditions. To qualify, the employer must have a written policy that meets specified criteria. Employers do not need to be subject to the FMLA to claim the credit.
  • A small employer pension plan startup credit is available to employers with 100 or fewer employees who adopt a new qualified retirement plan, provided that the plan covers at least one non-highly compensated employee. The credit is the greater of: (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b)$5,000. The credit applies for up to three years beginning with the year the plan is first effective, or, at the election of the employer, with the year preceding the first plan year. For the 2023 tax year, the credit is 100% of qualified start-up costs for employers with up to 50 employees. For employers with more than 50 and up to 100 employees, the credit is 50% of qualified start-up costs.
  • Small businesses may claim a general business credit of $500 for any tax year occurring in the credit period (generally three tax years beginning with the first tax year for which the employer includes an eligible automatic enrolment in its qualified employer plan (e.g., 401(k) or SIMPLE IRA). The credit is also available to employers that convert an existing plan to an automatic enrollment design. The credit is in addition to the small employer pension plan start-up credit.
  • The Small Business Health Care Tax Credit allows small employers with fewer than 25 full-time employees to claim a credit for nonelective contributions to purchase health insurance for their employees. The maximum credit amount is 35% to 50% for premiums paid by eligible small employers and 25% to 35% of premiums paid for tax-exempt small employers.
  • Certain food and beverage establishments may take a business tax credit of an amount equal to the employer’s FICA tax (7.65%) paid on tip income less the FICA tax due on the excess of the federal minimum wage over the employee’s actual hourly rate of pay. The credit is part of the general business credit.
  • Businesses that hired certain employees in specified target groups in 2023 may qualify for the Work Opportunity Tax Credit which has been authorized through the 2025 tax year. Generally, this is a one-time credit for each new hire in a target group. Certification that the worker is an eligible member of the target group is required. The credit may be applied against business income tax liability or for tax-exempt employers, the credit may be applied against payroll taxes.
  • While states determine the unemployment tax rate schedule at different times of the year, some operating on a fiscal year basis, many states will announce tax schedules by December and notify employers of their contribution rate sometime between December to February. Businesses should carefully review the annual rate information and determine whether a voluntary contribution, if permitted by the state, to buy down the rate would be advantageous. Also, employers should examine their rate notices to determine if the rate accurately reflects their unemployment experience in the applicable period. Time to protest the rate is limited.