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.)
Yes! Finally something about paycheck.
Thank you for being so clear and concise! Very useful so I don’t have to call up an accountant about a small question!
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?
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,
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?
It’s always the date of the check that counts, no matter when the work was done.
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??
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.
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?
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
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.
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.
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