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2robertc
January 21, 2025
Solved

Year End Entry Accrual that crosses classes

  • January 21, 2025
  • 1 reply
  • 0 views

Hi Friends- I'm struggling. By example I'm going to try and explain the issue:

  • I'm on accrual based accounting
  • Dr. A is a W2 employee - Set up in CLASS "DrA-EE" (Taxes withheld from payroll)
  • On 12/31/24, I owe Dr. A $10K
  • I set-up the accruals
  • PROBLEM: On 1/1/25, Dr. A becomes a K-1 (1099) partner - Set up in a different CLASS "DrA-PNR" (Taxes are not withheld and if I just post the adjustments to this class they won't be charged taxes on the $10K I pay them in January)

I am looking for a solution whereby I don't have to issue a W-2 and a K-1 to this person in 2025. In other words, what entries do I have to make to be able to accrue the money in 2024 and show the salary in 2025.

I hope that make some sense.

Thanks for your help.

 

Best answer by Carneil_C

Yes, that's right, @2robertc. We cannot accrue it as employee revenue in 2024 and then pay it as partner revenue in 2025. Below, I am sharing additional information to clarify things regarding year-end entry accrual.

 

As mentioned by my colleague above, since Dr. A earned $10,000 while classified as a W-2 employee, it should be reported as W-2 income for 2024. To ensure compliance, process the payment by issuing a paycheck on December 31, 2024. This will guarantee its inclusion on the 2024 W-2 form. Under the accrual accounting system, accruing this expense in 2024 is appropriate. Ensure the payment reflects applicable withholding taxes and deductions consistent with W-2 employment requirements.

 

Also, Journal Entries (JE) won't affect any payroll forms. Thus, it can only balance your books. This reference can give you more details about JE: Create a journal entry in QuickBooks Desktop for Windows or Mac.

 

Moreover, learn how to verify the status of payroll tax forms and payments submitted electronically via QuickBooks to the IRS or state agencies: Check the status of your payroll tax payments or filings sent through QuickBooks Payroll.

 

You can always rely on us here in the QuickBooks Community for additional assistance with your payroll forms. I'll be right there to help you whenever you need it.

1 reply

R
RogelioL
January 22, 2025

I appreciate you reaching out for guidance on this complex accounting scenario, @2robertc. Transitioning Dr. A's status from a W-2 employee to a 1099 partner indeed adds a layer of complexity, especially around the fiscal year-end. Let's walk through your situation to ensure everything is handled accurately.

 

The accrual accounting method you're using recognizes expenses and revenues at the time they're earned or incurred, regardless of when the cash transactions occur. Managing the transition between W-2 employee status and 1099 contractor status must be handled carefully to ensure compliance with tax regulations.

 

Since the $10K was earned while Dr. A was still classified as a W-2 employee, it properly falls under the W-2 class for 2024. You should process this payment (issue a paycheck) on 12/31/24, which will ensure it's reported on the 2024 W-2 form. Accruing this expense in 2024 is correct under the accrual accounting system, and the corresponding payment should reflect withholding taxes and other necessary deductions consistent with W-2 employment.

 

Starting 1/1/25, as Dr. A transitions to a 1099 contractor, any compensation from this date should be processed without tax withholdings as it corresponds to the new 1099 status. Payments for services rendered in 2025 should be tracked in a separate class (such as "DrA-PNR") and issued without typical payroll tax deductions.

 

Since the W-2 payment for $10K is processed at the end of 2024, a W-2 should indeed be issued in January 2025 reflecting this payment. For any subsequent payments made to Dr. A during 2025 under the contractor status, a Form 1099-MISC should be issued in January 2026, provided that Dr. A's earnings meet the threshold for 1099 reporting.

 

Given the potential complexities and implications across different tax forms, consulting with a tax advisor or the IRS directly about this dual-status issue is highly advisable. They can confirm that all aspects of this transition are handled in compliance with tax regulations and provide any additional guidance needed.

 

Handling the dual status of an employee and contractor requires careful consideration of both pay dates and tax reporting requirements. By ensuring proper classification and using the correct forms for each type of payment, you can maintain compliance and accurate records.

 

Additionally, you can check out this article to learn how to access your payroll tax payments and forms: View your previously filed tax forms and payments.

 

Thank you for being diligent about understanding and implementing these changes. Please don’t hesitate to reach out if you need further clarification or assistance. Good luck with this fiscal year transition.

2
2robertcAuthor
January 22, 2025

So it sounds like your saying there are no entries that would allow me to accrue this as employee (W-2) revenue in 2024 and pay it as partner (K-1) revenue in 2025 so that it gets picked-up on their K-1?

 

So I'm going to make the accruals in December 2024 and reversals in January 2025 under Dr. A's employee QB Class and issue them a W-2 for any payments I accrue in 2024 that get passed through to them in 2025.

 

I guess I finally found an accounting scenario that can't be handled by a Journal entry.

 

Thanks for the affirmation.

C
Carneil_CAnswer
January 22, 2025

Yes, that's right, @2robertc. We cannot accrue it as employee revenue in 2024 and then pay it as partner revenue in 2025. Below, I am sharing additional information to clarify things regarding year-end entry accrual.

 

As mentioned by my colleague above, since Dr. A earned $10,000 while classified as a W-2 employee, it should be reported as W-2 income for 2024. To ensure compliance, process the payment by issuing a paycheck on December 31, 2024. This will guarantee its inclusion on the 2024 W-2 form. Under the accrual accounting system, accruing this expense in 2024 is appropriate. Ensure the payment reflects applicable withholding taxes and deductions consistent with W-2 employment requirements.

 

Also, Journal Entries (JE) won't affect any payroll forms. Thus, it can only balance your books. This reference can give you more details about JE: Create a journal entry in QuickBooks Desktop for Windows or Mac.

 

Moreover, learn how to verify the status of payroll tax forms and payments submitted electronically via QuickBooks to the IRS or state agencies: Check the status of your payroll tax payments or filings sent through QuickBooks Payroll.

 

You can always rely on us here in the QuickBooks Community for additional assistance with your payroll forms. I'll be right there to help you whenever you need it.

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