The weather is getting cooler, children are finding their stride at school, and the holiday gatherings are beginning—that’s when you know it’s time to gear up for year-end payroll.
Regardless of the size of your organization, the year-end process for payroll is one of the busiest, and perhaps most important, times of the year. Because there is so much going on inside and outside of work during this time, it’s that much more important to plan—and this year-end payroll checklist can help you get organized, making the whole process a lot easier.
What is year-end payroll?
This process typically starts in the fall, which is when you’ll take the time to carefully review and verify your financial information in anticipation of the last payroll of the year, and ends in the first couple of months of the new calendar year with the filing of corporate taxes. During this process you’ll be responsible for tasks such as:
- Verifying that business and employee information is accurate
- Auditing employee payment records
- Verifying Affordable Care Act (ACA) information
- Setting bonus payouts and compensation for the following year
- Identifying and informing employees of any unused benefits that may expire
- Checking for any tax credits your organization may be eligible to receive
- Finalizing wages, taxes, and benefits for the year
- Sending out W-2s to your employees
- Filing year-end payroll taxes and depositing any taxes owed
- Setting up your payroll plan for the following year
The good news is that there are quite a few proactive steps that you can take to ensure a smooth process.
Year-end Payroll Checklist: What to do before the last payroll of the year
There are several important steps you’ll need to take before you process the last payroll of the calendar year that will set you up for success.
Verify your business and employee information: Ensuring that information is accurate ahead of your final payroll of the year will help save you time and avoid having to issue corrections to tax forms such as W-2s. Look at your quarterly tax forms and ensure that your organization’s name, address, federal and state employer verification numbers (EINs), and state unemployment account numbers are accurate.
In addition, ask employees to confirm that their full name, social security number, and address are accurate. If you work with independent contractors who require an IRS 1099 form, you’ll want to confirm their names and EINs as well. Compare what you’ve collected with what you currently have on file to ensure employees and contractors receive the critical tax documents they’ll need to file taxes accordingly.
Audit employee payment records: You can get a head start on auditing payments that have been processed for your employees by reviewing things such as employee wage amounts, benefits deductions, child support, garnishments and other deductions, and any tax exemptions throughout the calendar year for accuracy.
Verify ACA information: Reviewing your ACA information will help ensure a smooth filing process for your 1094-C form with the IRS. In addition, it might be a good idea to run a test filing to confirm that the IRS is able to accept your filing now so you can work out any kinks ahead of time.
Set up bonus payouts and compensation for the following year: If your company offers annual bonuses to your employees that are paid out at the end of the year, make sure those have been submitted for payment and that the amounts are correct. Your organization is probably also setting budgets for the coming year, so it’s a good time to verify any state or local minimum wage rate increases as well as any salary threshold changes that might affect exempt employees.
Identify and notify employees of any unused benefits that may expire: Your organization may offer employees a range of benefits from paid time off to Flexible Spending Accounts (FSAs), and there are likely different timeframes for when those need to be paid out. Specifically note any benefits that need to be paid out by the end of the year based on your organization’s policy or applicable laws and inform your employees of this so they can enter any final submissions before you close out the year.
Check for any tax credits your organization may be eligible for: As part of the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Employee Retention Credit (ERC) is available for qualified organizations that kept workers employed during the government shutdown or had a significant decline in gross receipts during 2020 or the first three quarters of 2021. This credit can be claimed retroactively. If your organization is eligible for the ERC for the 2020 tax period, the deadline to file for this is April 15, 2024, and for the 2021 tax period, the deadline to file is April 15, 2025.
Finalize wages, taxes, and benefits for the year: By this point you should have reviewed and made any necessary changes to wages, taxes, and benefits for the current year, but doing one last sweep to ensure that everything balances out is best practice. As you calculate summary numbers for your organization that you’ll use on year-end tax forms, don’t forget to include any benefits offered such as tuition reimbursement, stock options, paid time off, etc., in the employee’s income.
Year-end Payroll Checklist: What to do after the last payroll of the year
At this point you’ve processed the final payroll of the year and you’re in the homestretch—just a couple of other important items to button up before you’re done.
Send out W-2s to your employees: Once you’ve processed the last payroll for the current year you can begin to send out W-2 forms to your employees. Remember, regardless of delivery method, W-2s must be received by employees by January 31st of the following calendar year.
File year-end taxes and deposit any amounts you owe: It’s important to make sure your organization’s taxes are paid on time. Remember, the tax filing deadline for businesses is usually March 15th, which is earlier than the deadline for individual tax filing. If your business owes any taxes, you typically need to submit them to the IRS online through their business tax website.
Set up your payroll plan for the following year: Now that you’ve completed the year-end payroll process, it’s time to look at the calendar year ahead. Pay special attention to all federal and company holidays that fall on weekdays so you can adjust your payroll processing dates accordingly.
Congratulations, you did it! Although there are a lot of steps to wrapping up your payroll at the end of the year, all the hard work you put into it will set you up for success in the new year.
If you’re not already working with a human capital management or payroll provider, you may want to consider it for the coming year to automate some of these steps, bring greater visibility to any variances, and mitigate the risk of fines and penalties for noncompliance.