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Jean   Murray

End of Year Paychecks - Which Year's Taxes?

By December 18, 2011

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I† get asked this question every year, so I figured I would get it out for† you all to consider and so you can answer employee questions.

The Question: Are end-of-year paychecks taxable in the year of the work or the† year of the paycheck?

The rule is:† The paycheck is considered as taxable income in the year the paycheck is ISSUED (dated), even if the work was done and the pay was earned in a different year (but read the exception below).

For example:

You pay employees on January 2, 2012, for work done in the last week of December 2011.† The gross pay is taxable in 2012, not 2011.† If for some reason you wanted to pay employees on the last day of December for this work, the paycheck date of December 31, 2011, would mean the pay is taxable income in 2011.

An exception to this rule:

If for some reason you make paychecks available to employees before the end of the year, even if dated 2012 -- through direct deposit, for example -- the pay must be considered to be received (and taxable) in 2011.†† This is called "constructive receipt" and it means that the income is taxable if the person receiving it had control over it.

My suggestion: Don't get ahead of yourself; hand out paychecks when they are typically distributed.† Then you won't have any problem figuring out what's what.† And let your CPA or tax advisor help you if you have more questions.

How does this rule affect W-2 forms for employees?

The last paycheck dated in December is included in 2011 W-2 earnings.† That check dated January 3 is included in 2012 W-2 earnings.

More end-of-year tax timing tips for business income and expenses.

More about Preparing W-2 Forms (Remember, these forms must be given to employees by the end of January 2011.)

Comments
May 14, 2012 at 2:34 am
(1) link says:

Yes! Finally something about paycheck.

December 19, 2012 at 7:14 pm
(2) Ket says:

Thank you for being so clear and concise! Very useful so I don’t have to call up an accountant about a small question!

February 1, 2013 at 10:08 pm
(3) LEWIS WHITESCARVER says:

MY COMPANY PAYS ME ON THE 15TH AND LAST DAY OF THE MONTH AND MY PAY FOR THAT PERIOD IS NOT RECEIVED UNTIL THE END OF THE NEXT PAY PERIOD.

I WORKED THE LAST HALF OF DECEMBER 2012 FROM DECEMBER 16 TO DECEMBER 31, BUT MY WAGES FOR THAT PERIOD WERE NOT DIRECTLY DEPOSITED INTO MY CHECKING ACCOUNT UNTIL JANUARY 15, 2013. WHAT YEAR ARE THOSE WAGES TAXED?

February 2, 2013 at 8:59 am
(4) Jean Murray says:

Wages are taxable when received, not when worked. So if you received your pay by direct deposit on January 15, 2013, the wages are taxable in 2013,

February 8, 2013 at 11:28 am
(5) Gina says:

What if work period is last week of Dec 2012 to first week of Jan 2013 and paycheck is out on Jan 2013. How is this reported?

February 8, 2013 at 1:22 pm
(6) biztaxlaw says:

It’s always the date of the check that counts, no matter when the work was done.

February 27, 2013 at 12:04 am
(7) mrw says:

I switched from self-employed to an employee at year’s end, and received both a 1099 for December work paid in January, and a W2 for the rest of the year. Can I deduct expenses from December of prior year (including 1/12 of previous year’s annual expenses) on my Sked C??

February 27, 2013 at 10:22 am
(8) biztaxlaw says:

If you received a 1099 for December work and the check for that work was issued in January, the 1099 is incorrect. You should go back to the payer and ask them to re-issue the 1099. If you can’t get it corrected, call the IRS. Here’s a link to the information for disputing a W-2, and I assume the process works the same way for 1099s. The IRS should also give you information on what amount to use for your Schedule C.

March 7, 2013 at 5:20 pm
(9) Dave says:

There was a discrepancy with my 2011 pay that was cleared up in the beginning of 2012 and a check was issued to me in 2012 for the amount that was mistakenly withheld from ALL of my 2011 paychecks. Since I received that check in 2012, is it taxable in 2012 even though it was for pay periods dating as far back as the beginning of 2011?

March 19, 2013 at 2:11 pm
(10) Vera Weaver says:

I overpaid my state taxes by $ 336.00 last year for 2011. I looked at the forms my accountant had filled out incorrectly & picked out wrong number to pay. The state did not catch error/ how do I go about correcting my stupidity, and get my money back

March 25, 2013 at 8:18 pm
(11) Tom says:

I am self employed. I usually take a vacation in December at Christmas. My company( dentist) receives payments, but I do don deposit them until I return to work in January. IRS s on me now saying that my collections on my year end report do not match what I deposited. I told them that I was not there. They think I need to report that year earned. Please explain.

March 28, 2013 at 7:34 am
(12) biztaxlaw says:

It depends on whether you use a cash or an accrual accounting system. Most businesses use cash accounting, so that’s what I’ll assume. In cash accounting, income is recorded when actually received. So income should not be recorded on your books for checks that are not yet deposited; you may have received the money (you have it in your hand), but it hasn’t been received by your business yet until it’s in the bank. Or ask someone to deposit the checks for you while you’re gone. You might also check with your tax advisor to see which year to record and deposit those checks in.

April 14, 2013 at 6:49 pm
(13) Anna says:

I had a check issued to me in 2013 which was mistakenly not sent to me in 2012… They corrected the problem and sent the check in 1/2013 but it was for a payment owed to me in 2012 which year do I count this money in? Thanks

August 13, 2013 at 10:21 am
(14) Cathy Beckett says:

Thank you for this comment. I have been researching this for months. I didn’t like the answer but at least I have it.

December 30, 2013 at 12:12 pm
(15) Terri says:

Paydays are the 1st and 15th of the month. Employer gives first paycheck of year on January 2nd, but it is dated 12/31. The first check of the year is counted in prior year wages because they dated the check for the last day of the year but didn’t give the check on that date (actually 1st payday of the new year and given in the new year). Can they do that?

December 30, 2013 at 12:52 pm
(16) biztaxlaw says:

The paycheck is counted for income tax purposes in the year it is available to the employee. If the check was direct deposited into your account on the 31st, and you receive the information on January 2, then it’s available to you and is counted in the prior year.

December 31, 2013 at 12:15 pm
(17) Johnny says:

Our employer requires direct deposit but has had a problem. Although I have a piece of paper saying 12/31/2013 is when I got paid, the money is still not in my bank. I have received an email indicating that the money may not be there until 1/2/2014.

Is the paycheck received late(1/2/14) but dated 12/31/13 claimed on my 2014 taxes?

If so, my employer may have to revise W2′s if they include that money.

Thanks!

January 22, 2014 at 1:25 pm
(18) Andrew says:

I was trying to increase the salary of a shareholder by adding a significant amount to what I thought was his final paycheck for the year. This was in order to bring his salary more in line with what it should have been as a primary manager of the small business and also help with his taxes (by having more withholding to counter the liability from the earnings of the S Corp). Not realizing the timing of what you shared above, this amount will now be considered part of his 2014 income which defeats the whole purpose of what I was trying to do. The payroll was submitted on 12/31/13 and each employee (including this shareholder) received a direct deposit notification on that same day. However, the actual date of the check and the date the money was debited to employee bank accounts was 1/3/14. Is there any way we would be allowed to allocate this income to 2013?

January 22, 2014 at 2:28 pm
(19) biztaxlaw says:

The rule is based on when the money is available to the employee. If it didn’t go into the employee bank accounts until 1/3/14, that’s when it was available, no matter when the direct deposit notification is sent out. I would suggest checking with your accountant or tax advisor, just to be sure.

January 29, 2014 at 2:41 pm
(20) Kurtis Humbird says:

I was laid off on december 20th 2012 and recieved my full pay that day. I just recieved a 2013 w2 from that employer showing I earned $1770.00 for the 2013 tax year. I was not paid 2013 from that employer. Should I ignore that w2 since I didn’t receive pay in 2013?

February 3, 2014 at 8:16 am
(21) biztaxlaw says:

William Perez, at Tax Planning, has a good article <a href=?http://taxes.about.com/b/2006/03/01/incorrect-w2-what-to-do.htm?>about how to deal with a W-2 you feel is incorrect</a>.

February 16, 2014 at 1:00 pm
(22) cgal says:

I was laid off on december 20th 2012 and recieved my full pay that day. I just received a 2013 w2 from that employer showing I earned $1013.00 for the 2013 tax year. I was not paid 2013 from that employer. Should I ignore that w2 since I didnít receive pay in 2013?

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