End of Year Employee Paychecks - Which Year's Taxes?

Which Year's W-2 for Tax Purposes?

employee paychecks
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A common question from employers relates to writing and distributing employee paychecks at the end of the year. 

Which Tax Year Should an Employee Paycheck Be In? 

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, 2015, for work done in the last week of December 2014.  The gross pay is taxable in 2015, not 2014.  If you pay employees on the last day of December for this work, the paycheck date of December 31, 2014, would mean the pay is taxable income in 2014.

An exception to this rule:

If you make paychecks available to employees before the end of the year -- through direct deposit, for example -- the pay must be considered to be received (and taxable) in 2014, even if the direct deposit check is dated in 2015. The IRS says employees must have access to the paycheck  "without substantial limitation or restriction." 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 and don't try to over-think this. Hand out paychecks when they are typically distributed.

If you are confused, you can get help from your CPA or other tax professional. If you are REALLY confused, you might want to consider getting a payroll service to help with these kinds of issues. Read more about selecting a payroll service.

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

The last paycheck dated in December is included in 2013 w-2 earnings.

  The first paycheck in January is included in 2015 W-2 earnings. Read more about Preparing w-2 Forms (Remember, these forms must be given to employees by the end of January 2015, for 2014 wages.) If you are using payroll accounting software, the software should take care of the tax issue for the employee W-2s.

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