Year-End Payroll and Benefits Planning
When it comes to compensation and benefits, the end of the year is a busy time for employers. It's a time to wrap up matters for the current year and consider new policies for the coming year. Here are some actions to take into account.
Set year-end bonuses
Many companies choose to offer annual bonuses to employees. Bonuses are tax-deductible, but when do you deduct them? Assuming that you report your income and expenses on a calendar-year basis, then:
- If you are a cash basis business: Deduct the bonuses in the year in which they are paid. If you pay 2017 bonuses in 2017, they're deductible for 2017. If you pay 2017 bonuses in 2018, they're deductible in 2018.
- If you are an accrual basis business: Bonuses declared (and accrued) before the end of the year are deductible in this year if they are paid within 2½ months after the close of the year (provided that the employee is only required to be employed on the bonus declaration date and not on the bonus payment date). However, bonuses paid to S corporation shareholder-employees are not deductible until paid. For owner-employees in a C corporation, the bonus is deductible only when paid in the case of a personal service corporation or for majority (more than 50%) owners.
Set compensation for next year
As you prepare your budget for the coming year, you may want to factor in pay raises for your staff. Of course, the amount you offer depends on what you can afford after factoring in both the cost of compensation and payroll taxes.
Keep in mind that the wage base for the Social Security portion of FICA in 2018 will be $128,700, which as an employer will result in paying more FICA taxes, as the 6.2 percent share is applied to this higher wage base. For hourly workers, check to see if there is a minimum wage rate increase for your location next year. Increases take effect in Hawaii, Maine, Oregon, along with many other states and cities; some states (such as California, Florida, Ohio, and others) also adjust their rates to the cost of living.
Advise employees about unused benefits
Some of the benefits that employees earned or paid for in 2017 may expire at the end of the year. Consider company policy for these benefits and advise employees accordingly:
- Vacation, sick days, or personal leave time: Under company policy, can unused days be carried over? And if so, are there limits to the amount that can be carried over?
- Flexible spending accounts for medical costs and dependent care: Usually, FSAs have a use-it-or-lose-it feature. Generally, amounts remaining in the account at the end of the year are forfeited. However, plans may allow employees to submit claims within a set time (e.g., 30 days after the close of the year) for expenses incurred in the previous year. For example, an employee may submit reimbursement for a medical expense incurred on December 15, 2017, by January 30, 2018. A medical FSA can provide for a grace period of up to 2½ months after the close of the year for new expenses. Or the FSA can allow for a carryover of up to $500; the FSA cannot offer both a grace period and carryover option. Advise employees about the terms of your plans.
Sign up employees for next year's benefits
You may offer a menu of benefits that employees can choose from, including:
- 401(k) plans: If your company matches contributions, inform employees about the matching amounts.
- Medical coverage: If your company offers a health plan, be sure that employees are signed up for coverage that begins on January 1, 2018. If you offer more than one type of plan, provide an explanation of the options. Also, if you have a medical FSA, allow employees to commit to their 2018 contributions. The maximum contribution limit for 2018 is $2,650
You may have other or additional benefit offerings to explain to your staff so that they can be in place at the start of the new year.
Many employers prioritize finding qualified workers as a top business concern. This can play a factor as you finalize your payroll activities this year, and set compensation and benefits for next year.