Fact: an entity plans to run their 1/8/09 payroll and backdate it to 12/31/08.

(My perception is that this is to facilitate the change from in-house to out-sourced payroll).

I believe that this is not allowed, but I can't find solid substantiation other than the IRS' definition of contructive receipt. (As a semi-monthly depositor, their tax deposit will most definately be late!)

Guidance is most appreciated......

Generally speaking, you are absolutely correct that in-house payroll processing makes it easier to run after the fact payroll which is then backdated to 12/31/08.

This is possible as the IRS requires corporations or businesses to make their 4th quarter payroll deposits either on Jan 15th or Jan 31st depending on whether or not they are a quarterly or monthly depositor of payroll taxes.

Now, the question is whether or not this is technically correct or not, I personally have never encouraged this practice and most of my clients have payroll processed from a payroll processing company. This means the last payroll has to be processed a few days before year end!

If there was a reason for the delay in running the payroll before year end, then I suppose you may have a reasonable cause to do so, but trying to abuse the spirit of the law is unacceptable and the IRS does not allow this practice. I would not recommend this practice!

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Ask TaxGuru Please refer to the legal disclaimer.

The payroll was and continues to be scheduled for 1/8; they just want to date it 12/31 so that the new payroll company will not have to re-enter an already processed payroll when they take over at the next period.

I'm debating about having a friend make a big stink over it (admitedly, "sour grapes" driven) because I feel it's wrong - and they've made poor choices in getting to this point and into this mess. All of these employees think they've received all of their 2008 wages, but this little manipulation is being thrown in and will also throw off annual salaries. Looking at the constructive receipt rules, I believe this fails: the money was not available on 12/31 and was never intended to be. Furthermore, they're even paying wages on 12/31 that weren't earned until 1/1 & 1/2.

They are a semi-monthly depositor, so the tax must be called in no later than Wednesday (a day later due to the holiday), but they won't figure that out, so it will go in a week late. (Yes, again I admit my "sour grapes.")

Thanks for the validation.