6 Checkups to Avoid Year-End Tax Headaches

11.24.2020 | If you check these six things now, you’ll be doing your future self a favor.

Tax errors are sometimes discovered only after year-end calculations are completed and employees have received their W-2s. It’s frustrating to find and time consuming to fix. To help you avoid headaches, we’ve identified the most common oversights (and added a new one for 2020).

1) Ensure you are using 1040 marital status and exemption numbers

When calculating gross-up at year-end, you should not use W-4 marital status and exemption numbers. 1040 marital status and exemption numbers are what will be claimed on the actual 1040 Federal and state tax returns that will be filed by individuals early next year. W-4 data is typically shown in payroll systems for withholding purposes, but often don’t reflect the actual 1040 information. We recommend that accurate 1040 information be used for these calculations; if necessary, verify the data directly with employees.

2) Check your gross-up settings

Seven states still allow an exclusion/deduction for moving expenses; these states include, Arkansas, California, Hawaii, Massachusetts, New Jersey, New York, and Pennsylvania. If you are accounting for this on your reports, be sure that your system is set up so that gross-up is not calculated for these expenses in these states.

3) Check for any COVID-related expenses that may be non-taxable

Expenses that were incurred due to COVID-19 may be considered non-taxable reimbursement and should be treated accordingly. These payments must be considered “reasonable and necessary” and not compensated by insurance or other reimbursement, per Section 139 of the Internal Revenue Code. For more details, check out our blog.

4) Check ALL switch settings in your relocation software

It is very easy for a setting to accidentally be changed by a user. Many settings can significantly affect final calculations.

5) Check for previous relocations

When you receive YTD earnings information from the payroll department to be used for year-end calculations, verify whether or not they include previously-reported relocations. This determines the system’s starting point for calculations and it needs to be accurate.

6) Ensure expenses include the correct year

Weeks into the new year, many people still cite the previous year when completing expenses. It’s best to run an audit report and double check the expense dates.

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