Avoid Common Mistakes at Year-End

A common mistake at year-end is allowing too little time to prepare your tax forms. Plan to do a test run, so that if you have any problems you can reach your accountant (or us) in time. Remember, everyone is busy at the end of the year. The more lead time you give yourself, the less panicked you'll be.

The process of creating the forms with QuickBooks is very quick, but if technical issues arise, resolving them can be time consuming. Additionally, you may have questions about some of the data on your form. In this case, you'll want to allow time for research and double-checking the numbers.

If you do a test run, be sure to do an end-to-end test, including a test print of one or more forms, to familiarize yourself with the printed output and to resolve any potential technical issues.

You'll want to make sure you're using the most recent versions of Form W-2 and Form 940 when you prepare your filings. If the IRS has made any changes to these federal forms, the latest ones will be included in a payroll update. Payroll updates for QuickBooks Enhanced Payroll subscribers will also include the latest state forms for which tax agencies have made changes.

Ensure your tax forms print with the correct year. For many forms, the year that prints at the top of your form denotes the year of the form you have in QuickBooks. For example, if your form says "2007," you have the 2007 version of that form in your copy of QuickBooks. This is what you will need to prepare your annual forms this year. If your form says "2006," you need to download the latest form, which will be included in a payroll update. If you have downloaded the latest payroll update and your form still says "2006," check www.quickbooks.com/payrollnews for news about payroll updates.

Turn on Automatic Updates for QuickBooks Payroll. The best way to make sure you have the latest payroll updates is to turn on the Automatic Updates feature, which tells QuickBooks to check for new payroll updates automatically. Automatic Updates is the easiest way to stay on track with updates.

If you don't turn on Automatic Updates, make sure to check for new updates every time QuickBooks prompts you to. QuickBooks Payroll releases payroll updates as many as 12 times in a year—and sometimes more—because federal and state governments make changes to their tax laws, rates, and forms at any time during the year. Since the actual number and dates of payroll updates vary depending on federal and state actions, we highly recommend that you connect to the payroll service each time you pay your employees (or at least every 45 days) to ensure that you have the most current tax table and forms available. 

To learn about the latest payroll update, go to www.quickbooks.com/payrollnews.

For instructions about updating your software and enabling or disabling Automatic Updates, click the link for your version of QuickBooks below, and then click on Automatic Update:

• QuickBooks 2008
• QuickBooks 2007
• QuickBooks 2006
• QuickBooks 2005

Check that you have installed the latest payroll update. To determine whether you have installed the latest payroll update:

1. Check the Payroll News Web site to find out the number of the latest payroll update.
2. Check whether that is the same update as you have in your QuickBooks: From the Employees menu in QuickBooks 2008, 2007 and 2006, choose Get Payroll Updates. From the Employees menu in QuickBooks 2005, choose Get Updates, and then Get Payroll Updates. From the Payroll Center in Simple Start 2008, choose the Setup and Maintain button and then choose Get Payroll Updates. The tax table (payroll update) version number is located at the top of the window.

3. Use the Correct Tax Tracking Type on Payroll Items to Help Ensure That Amounts Appear in the Correct Box on Form W-2 and on Other Federal and State Forms

If an amount ends up in the wrong box on a Form W-2, it's usually because a payroll item has the wrong tax tracking type. Open the payroll item, click Next until you reach the Tax tracking type window, and review the description for the type currently assigned to the item. The description tells you what effect the type has on the W-2. If it's having the wrong effect, change the tax tracking type to the correct type. When you review your W-2s again, the amount should appear in the correct box.

Note: If you change a payroll item's tax tracking type, the new type might affect a different collection of taxes you have in use. If so, the wage base for your taxes might be incorrect, and you might have withheld the wrong amount of tax. Consult your tax professional on how to correct any resulting issues.

4. Set Up Employees Properly for State Taxes in QuickBooks

Remember that state taxes, including company-paid state unemployment insurance (SUI), are important to set up correctly in QuickBooks. Even taxes paid by the employer must be included in the employee setup. In QuickBooks, all payroll taxes are calculated, accrued, and tracked on paychecks.

Not setting up these taxes will result in incorrect tax forms, and the employees not set up for a particular tax will not be listed in the appropriate state forms. QuickBooks knows an employee is subject to a certain state tax only if you use the state and its taxes in the state setup area on the employee record and complete all the required information. For example, an address or the fact that you have only one state set up in your QuickBooks file is insufficient and will result in form errors.

To create a payroll item for state taxes, simply begin to use the item on an employee, and QuickBooks Payroll will guide you through setting up the tax.

1. To create a new employee record: From the Employee Center in QuickBooks 2008, 2007 and 2006, click New Employee. Or from the Employee List in previous versions, click the Employee menu button and then New. Or, to edit an employee record: From the Employee Center in QuickBooks 2008, 2007, and 2006, double-click the employee name on the employee list. In previous versions, from the Employee List double-click on the name of the employee.
2. From the Change tabs drop-down list, choose Payroll and Compensation Info.
3. Click the Taxes button.
4. Click the State tab.
5. Make sure the information is correct or complete it if necessary. When you select the taxes for a state, and they don't yet exist in QuickBooks, you'll be prompted to create them and led through the Payroll Item wizard.
6. Click OK to save the employee record.

If employees elect not to withhold income tax, they are still subject to the state tax. (They are both subject to the tax and claiming exempt from it.) In the employee setup, you must select the proper state in the state drop-down menu and then select Don't withhold from the drop-down list.

If your company is exempt from SUI, but you are required to file SUI quarterly forms, you should still set your employees for SUI, but enter a 0% rate for the tax on the payroll item.

5. Print Your Employee W-2 Copies from QuickBooks onto a Preprinted Form or onto Blank Perforated Paper

You have two options for printing your W-2 forms:

• You can print onto the customary red preprinted forms. These forms are available for purchase at www.intuitmarket.com/C39352.
• Or, you can print onto blank perforated paper. If you choose this option, you will print the employee sections of Form W-2 onto blank perforated paper and the rest of the W-2 sections onto blank paper. QuickBooks software will print the necessary form outline in black ink onto the blank paper. The government will accept non-employee sections of the W-2s printed from QuickBooks on blank paper with black ink, even though they aren't printed in the customary red ink of the preprinted forms. The Blank Perforated Paper Kit is available for purchase at www.intuitmarket.com/C39352.

6. Use the QuickBooks State Forms That Can Be Scanned, Even Though They Look Different

For some states, QuickBooks Enhanced Payroll offers forms that the state agency scans with a computer. When printed from QuickBooks, the form will not look like the preprinted government form you receive by mail. However, it complies with the state's requirements and has been approved. The printed form contains only essential data necessary for the state to process the form using the state's scanning equipment. Forms for Oregon and Texas look very strange when printed, but are accepted by the state.

7. Examine the Dates on Payroll Liabilities Checks to Understand the Numbers on Your Form 940

Federal Form 940, the Employer's Annual Federal Unemployment Tax Return, reports your federal unemployment tax (FUTA) liability for the calendar year. If the numbers on your Form 940 don't look right, first make sure you've been using the Pay Liabilities window (not the Write Checks window) to pay your payroll taxes and other payroll liabilities throughout the year.

QuickBooks uses the payroll liability checks you create in the Pay Liabilities window to keep track of your tax payments and to generate your reports and tax forms. If you use the Pay Liabilities window, QuickBooks will also know how much you owe—otherwise, the program will not display the correct amounts when you run reports and prepare tax forms.

To access the Pay Liabilities window, from the Employees menu, choose Process Payroll Liabilities, and then Pay Payroll Liabilities. If you have previously used Write Checks to pay payroll taxes or other payroll liabilities, you may find some liabilities will need to be adjusted. For more information, see "Pay payroll taxes and liabilities" in QuickBooks Help and the QuickBooks Knowledge Base article "Paying payroll taxes and other liabilities" for your version of QuickBooks.

When you pay your liabilities in the Pay Liabilities window, QuickBooks uses the date in the through field to fill in fields for Form 940 and Form 941 and to calculate the amounts due. You can look at the liability check QuickBooks created to see the date your liabilities were paid through and check it for accuracy.

1. From the Lists menu, choose Chart of Accounts.
2. Double-click the bank account from which you make payroll liability payments.
3. Select the liability check you want to see (look for a check with LIAB CHK in the Type field), and click the Edit Transaction button on the register.
4. Check the date in the Payment for payroll liabilities through field. For example, if you entered a tax payment on September 10 for tax you owed as of August 31, the date should be 8/31 or earlier, but not after the quarter-end.

Quick Tip: QuickBooks uses payroll items to track individual amounts on a paycheck or payroll liabilities check, to accumulate year-to-date wage and tax amounts for each employee, and to calculate amounts for your Form 940. To verify the accuracy of any payroll item amount, go to the Payroll Item List and run a QuickReport for the payroll item in question.

To run a QuickReport from a list:

1. In the list, select the line item for which you want to create the report.
2. From the Report menu button at the bottom of the list window, choose the QuickReport for the selected line item.

To run a QuickReport from a register:

1. In the register, select the transaction for which you want to create the report.
2. Click the QuickReport button on the toolbar at the top of the window.

For more information, see the topic, "Preparing the Federal Form 940" in QuickBooks Help.

8. Set Up Your Independent Contractors as Vendors, Not as Employees

Your independent contractors must be set up in QuickBooks as vendors, not as employees. This mistake is common. The IRS states that if you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty. The IRS article "Independent Contractors vs. Employees" discusses the differences between employees and independent contractors, and the importance of classifying them correctly.

It is a good idea to double-check your employee and vendor list and ensure that everyone is assigned correctly before year-end arrives. Fixing misclassifications can be time consuming. In QuickBooks, only Vendors can receive 1099 forms, and only Employees can receive W-2 forms.

Fix misclassifications before preparing your 2007 Form 1099s and Form 1096. Set up each independent contractor as a vendor, and append the name with curly braces, which will not print. For example, if the employee was Jane Doe, create a Vendor Jane Doe{V}. Refer to the topic "Adding a 1099 vendor (independent contractor)" in QuickBooks Help for instructions and more information.

Then go back to the checks you wrote to the independent contractor and choose the vendor name as the payee. If you withheld taxes from the checks, consult your accountant or tax advisor for help on fixing the misclassification.

To avoid further transactions with the independent contractor classified as an employee, make the person inactive in the Employee List.

1. Display the Employee List. (In QuickBooks 2008, 2007, and 2006, click the Employees tab in the Employee Center. In QuickBooks 2005, from the Employees menu, choose Employee List.)
2. Double-click the name you need to make inactive.
3. In the Edit Employee window, select the Employee is inactive checkbox.
4. Click OK.

Ensure correct setup for 2008. To help make sure you set up your independent contractors correctly in 2008, refer to the topics "Adding a 1099 vendor (independent contractor)" and "Pay independent contractors" in QuickBooks Help.

For more information and instructions about Form 1099, visit The Basics: QuickBooks Payroll, or refer to http://www.irs.gov/pub/irs-pdf/i1099gi.pdf.

9. Download Payroll Updates Before Running Your First Paycheck of the New Year

The federal government and most state tax agencies issue new tax rates and limits at the beginning of the year, and these changes are included in payroll updates released in December and January. Be sure to download payroll updates before running your first paycheck of the new year, so the correct tax amounts are withheld from your employees' paychecks.

To ensure you have the latest update available, first make sure that your payroll subscription hasn't expired. If your subscription is up for renewal in December or January, make sure your credit card information and expiration date are current so that your service isn't interrupted if QuickBooks Payroll cannot renew your subscription.

To verify or make changes to your QuickBooks Payroll subscription in QuickBooks 2008 and 2007:

1. From the QuickBooks Employees menu, choose My Payroll Service and then choose Account/Billing Information.
2. On the QuickBooks Payroll — Account Maintenance page, in the Update Information section, click Edit. On the QuickBooks Payroll — Account Information page, in the Payment Information section, click Edit and update your payment information, and then click Continue.
3. If applicable, update company information or contact information by clicking Edit and then Continue.
4. When you have completed your changes, from the QuickBooks Payroll Account Information screen, click Update.
5. Review and print the Confirmation page, and then click Done.

To verify or make changes to your QuickBooks Payroll subscription in QuickBooks 2006:

1. From the QuickBooks Employees menu, choose Payroll Services Activities and then choose Update Payroll Account Information.
2. On the QuickBooks Payroll — Account Maintenance page, in the Payment Information section, click Edit and update your payment information, and then click Continue.
3. If applicable, update company information or contact information by clicking Edit and then Continue.
4. When you have completed your changes, from the QuickBooks Payroll Account Information screen, click Update.
5. Review and print the Confirmation page, and then click Done.

To verify or make changes to your QuickBooks Payroll subscription in QuickBooks 2005:

1. From the QuickBooks Employees menu, choose Payroll Services and then choose View/Change Payroll Service Account Information.
2. In the Update Information section, click Edit. From the Payroll Information section, click Edit and update your payment information, and then click Continue.
3. If applicable, update company information or contact information by clicking Edit and then Continue.
4. When you have completed your changes, from the QuickBooks Payroll Account Information screen, click Update.
5. Review and print the Confirmation page, and then click Done.

10. Update Your SUI or SDI Rate Before Running Your First Payroll of the Year

QuickBooks Payroll subscribers must update their state unemployment insurance (SUI) rates themselves. The QuickBooks Payroll tax table does not include updates to these rates, because states assign each employer a unique rate based on their employment history.

Employers located in states that have state disability insurance (SDI) may also need to update their SDI rates themselves. For some states, however, the state disability insurance rate is supplied by the tax table, and you cannot edit it. If the rate changes, check to see if you have the current tax table.

If you use Standard or Enhanced Payroll, update your rate on or after Jan. 1, 2008, but before you run your first payroll of the year.

Do not update your rate before Dec. 31. If you do, your state unemployment (or disability) withholdings for your remaining 2007 paychecks will use the new rate and will be incorrect.

Update your SUI or SDI rates in QuickBooks by editing the appropriate payroll item:

1. In QuickBooks 2008 and 2007: Select Manage Payroll Items, and then choose View/Edit Payroll Item List.
   In QuickBooks 2006 and 2005: From the Employees menu, choose Payroll Item List.  In QuickBooks Simple Start 2008:  From the Payroll Center, choose the Setup and Maintain button and then choose View/Edit Payroll Item List.
2. Select your SUI or SDI payroll item.
   If your state disability insurance is collected by a private agency, the associated payroll item may be set up as other tax, not state disability. How do I edit the rate of a user-defined other tax payroll item?
3. From the Payroll Item menu button, choose Edit.
4. Click Next in the Payroll Item Setup wizard until you see the tax rate window.
5. Enter the new rate in the Company rate or Employee rate field.
6. Click Next until you can click Finish.