Check delay causes discrepancy between W2 and Category Report

Jim7342

I receive lots of checks that are up to four months old according to the date on the check. (Sadly, there is no changing this.)
For example, check dated 11/15/22 but deposited 2/12/21.
At the end of the year this becomes a problem in that the check will be included in my category report from my accountant, but will be included on my W-2.
What’s the best way to deal with this?

Jim7342

I meant WON’T be included in category report, but WILL be included in W2.

volvogirl

Are you saying you get checks but might not deposit them until the next year?  Then you need to set up a intermediate holding account for checks received.  Set up a cash account and call it something like Checks Received or Undeposited Payments.  Enter the checks into it with the right payment date.  Then when you deposit the checks you make the deposit a Transfer to the holding account to clear it out.  Then it will show up in the right year.  

Jim7342

Hey, Thanks for responding! No, I get them and deposit them now, but they are dated from 4 months ago. So when the new year starts there's a 4 month period where my Q report will consider it 2022 income, but it's actually on my 2021 W2.

volvogirl

That seems very odd.  Have you talked to your employer about it?  Why are you getting them 4 months late?  

Jim7342

They are processed through a third party and it can't be changed.

Jon

The only thing I can think of is to do something similar to what @volvogirl suggested. When you receive one of these checks, enter a transaction in the holding account with a transaction date matching the date on the check. Then when you deposit the check in your bank account record that as a transfer from the holding account to your bank account.

jacobs

Let me expand on the use of a holding account...

I have an Asset account I call "Exchange" which I use for anything where there is a time shift or time split in the completion of the transaction. (Accountants sometime call such an account suspense. In your case, if it's for a single purpose, you could call in Pending Pay or Receivables or whatever describes it best.)

For instance, if I buy theater tickets for us and friends on December 28, and the friends repay me on January 5, I use this account to deal with the split across months and years. For the December purchase, the transaction amount is what I paid in total, and I split the transaction with half going to my entertainment expense category and have going to a transfer to my Exchange account. When I get paid back, I record the deposit transaction as a transfer to Exchange, zeroing out the asset account.

When I had a lot of reimbursable expenses for work, I did the same thing: record the purchase as a charge to the Exchange account, and the reimbursement payment as a credit to that account. I also sometimes use the same approach if I had a large purchase near the end of the year which was returned, but the credit wasn't received until the following year.

And you can do the same with your pending checks. Record the income as earned when the check was issued. This would be your regular paycheck entry, with split lines for all your withholding, exactly as shown on your check stub and eventually on your W-2. But record the pay transaction in the Asset account, not your checking account. This mirrors the real world: there's no money in your checking account yet.

When you do get the payment, record it as a simple deposit into your checking account, with the category being a Transfer to the asset account. This places the money in your checking account so it will match your bank statements, and it reduces the amount of money you're waiting to receive. (If they ever caught up, it would zero out the account.)

Now your reports will be correct. Your 2021 reports will correctly show what you were paid in 2021, so it will match your W-2. and your checking account will match what you have actually received, when you receive it. 

Please post back if any of this isn't clear.

NotACPA

I think that a call to the IRS is in order.  You are, in all probability since you're on a W2, a "cash basis, calendar year" taxpayer.

That "cash basis" means that money isn't income to you until you actually receive it. The date on the check isn't really pertinent when you don't receive the check until the next calendar year ... UNLESS it's thru some action on your part that's causing the delay,

jacobs

@NotACPA I'm not sure this will help @Jim7342 but I'm curious about your comment...

If the employer pays someone $1,000 per week every week, they would issue s W-2 showing 2021 earnings as $52,000. But the employee has received only 48 of those checks, and can report only $48,000 income? I can't imagine that any discrepancy between the W-2 and tax filing wouldn't immediately trigger an IRS notice of an error.

How would the employer know when the checks will be received in order to report only the $48,000 as 2021 pay?

I understand IRS defines "constructive receipt" of income as occurring "when an amount is credited to your account or made available to you without restriction. You do not need to have possession of it." But in this case, the individual doesn't have receipt of it, so I agree with you that the checks not received probably don't have to be counted as 2021 income. It seems the company, or third third-party processor, is at fault for such an egregious delay between issues pay and getting it into the hands of their employees. Nonetheless, I'd seriously question whether it's worth the hassle of trying to not report the income which matches the W-2; reporting income not matching the W-2 would trigger correspondence from IRS for taxes owed plus penalties and interest, and the need to reply to IRS to document everything to try to get IRS to accept it and remove the calculated taxes due plus penalties and interest. 

In any case, @Jim7342 isn't asking for tax advice — and he seems to indicate he accepts this bizarre four-month delay in receiving pay — but for how to make his record in Quicken match what's happening in the real world, and for that, I think my reply above about a holding account in Quicken will solve the problem.