How will 1/1/21 direct deposit paychecks that credit on 12/31/20 be treated?

[waggett]

My company will issue biweekly direct deposit paychecks on 1/1/21, but because of the holiday the money will actually hit my checking account a day early on 12/31/20. The pay stub I receive will be dated 1/1/21 even though the money credits to the account the day before. 

The IRS says that income is "constructively received" when it's credited to an account or made available without restriction, which in this case will be 12/31/20. Will this rule hold true, and the income be considered earned in 2020, with the date in the pay stub showing as 1/1/21?

[xmasbaby0]

Why are you asking this?  PLEASE do not try to prepare your tax return for 2020 using your last pay stub instead of waiting for the W-2 that your employer will issue to you by the end of January.  

By waiting for your W-2 you will be able to file accurately.  If you try to guess what goes in the W-2 “boxes” and mess up your return, you will need to amend.  It takes about 4 months to amend a tax return.  The IRS will not be accepting 2020 returns until the end of January —  so you can wait for your W-2.  If you are hoping to get a quick tax refund by filing early, using your pay stub might have the opposite result.  Your tax return will not match the W-2 reported to the IRS by your employer; this may result in rejection of your return — or if accepted, could actually delay your refund for months.  And, if you are hoping to get EIC or the refundable amount of the child tax credit, your refund will not be released until late February anyhow.  It is much wiser to wait for your W-2 and file correctly.

[xmasbaby0]

Please be careful about being in too much of a hurry to file your next tax return. Many tax forms are not available at the very beginning of the tax season, so you have to wait for your forms. The software still needs updates at the beginning of the tax season. 

Although the software will allow you to e-file in early January, the IRS does not begin to accept the e-files until almost the end of the month.  So your return just sits on the server.  If you realize that you made a mistake or left something out—as many people do—you cannot change it.

Every year we see people who are in such a rush to file that they file incorrectly and incompletely.  If you file too early and leave out a W-2 or a 1099, or forget to enter information, you will end up having to amend your tax return---and that takes months.  Employers have until the end of January to issue W-2's----and ALL of your 2020 W-2's have to be on the same tax return.  Many of the 1099's and 1098's you need do not arrive until late January or sometime in February.  If you are getting Earned Income Credit or Additional Child Tax Credit, the IRS is going to hold your refund until the end of February no matter how early you file.  There seems to be a greater chance of "early" returns being reviewed and those refunds are delayed, or early returns are more often subject to identity verification--which will also delay processing.  Filing too early may just be a recipe for a delayed refund.  It might go more smoothly for you if you wait until at least mid-February to file instead of e-filing during the first minute that you can do it.

[NCperson]

ask your payroll department, but assume it will be a 2020 income.  When you receive your 1/1/21 paystub, look at the year to date amounts.  Did they reset? Probably not. 

how do know that paystub will be dated 1/1/21 and not 12/31/20? or are you just assuming? 

As others posted, wait for the W-2 to populate Turbo Tax as that will eliminate issues later. 

[Hal_Al]

Q.  Will this  income be considered earned in 2020 or 2021.

A.  You don't have to (or get to) decide that.  It goes by which W-2 (2020 or 2021) your employer puts the income on.  As others have said, ask your payroll dept. or wait for your 2020 W-2. 

[waggett]

I did send payroll an email and so far I'm just hearing crickets... they either blew the question off or it's confounded them beyond the ability to respond.

I am assuming that it will be dated 1/1/21 based on the company's past practice in this scenario, but they may do it differently because of the tax ramifications involved.

My hope is that it will be considered 2020 income because I determined in mid-October that I had withheld well in excess of what I will need to pay in taxes for 2020 and went exempt for the remainder of the year; if it's 2020 income the taxes are covered, if it's 2021 income I need to change my withholding before the first of the year.

If I don't hear anything in a week I'll probably just change the withholding and see what happens, that way if it's 2020 income I'll get the money back in February as a refund and if it's 2021 income the taxes will be covered. I would really prefer that it be considered 2020 income for the obvious reason.

[macuser_22]

If you have constructive receipt of the money in 2020 then is should be included on your 2020 W-2 regardless of the date on your pay stub. That is one reason that you can never use paystubs since W-2s are often somewhat different.  The IRS goes by the W-2, not the pay stub.

[Opus 17]

The doctrine of constructive receipt says that you report the income when you actually receive it and are able to use it.

However, I can see the problem in the situation because of the nature of the ACH system.  ACH deposits are a two-step process. The sending bank initiates the deposit which tells the receiving bank that money is on the way and gives the receiving bank a chance to verify account numbers or other information. Then within 48 hours, the transaction is settled and the money is actually credited to the receiving bank. Some banks will allow you to access the funds on notice of pending deposit, without waiting for the settlement. (My current checking account does not allow me to access funds until the transaction has settled, but my previous checking account allowed me access to the money as soon as they received the advice of a pending deposit.)

This can create a situation where the deposit is not settled until Wednesday but you have the ability to withdraw and spend the funds on Monday or Tuesday.  That may not happen at the end of this year as you think it might, since January 1 is a Friday and the banks are closed, followed by Saturday and Sunday.  I suspect your employer will either make the deposits on the 31st, or wait until January 4, and this won’t be a problem.  

However, if you are in a situation where you have access to the money before in 2020 but the transaction is not officially settled by the banking network until 2021, I would ignore the doctrine of constructive receipt in this case and just go by whatever your W-2 says.  You will have far more difficulty reporting wages that differ from your W-2 for both 2020 and 2021 than simply reporting whatever is reported to you.