The temperatures are dropping, kids have settled into their school routines, and holiday gatherings are kicking off — that’s when you know it’s time to prepare for year-end payroll.
The year-end payroll preparation process is among the busiest and most critical times of the year, especially for small to mid-sized businesses. With so much happening both at work and at home during this season, it’s even more essential to plan meticulously. This comprehensive year-end payroll checklist can assist you in organizing your tasks to simplify the entire process.
What Is Year-End Payroll Preparation?
This process typically begins in the fall, a period during which you carefully review and verify your financial records in preparation for the final payroll of the year. It concludes in the initial months of the new calendar year with the submission of corporate taxes. Throughout this period, you’ll be tasked with responsibilities 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 eligible tax credits
- 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 encouraging news is that there are several proactive steps you can take to ensure a smooth process.
Checklist: Tasks to Complete Before the Final Payroll of the Year
There are several important payroll preparation steps you should take before processing the last payroll of the calendar year to set yourself up for success.
Verify your business and employee information: Ensuring that all data is accurate before your final payroll of the year will save you time and prevent the need for corrections on tax forms such as W-2s. Review your quarterly tax forms and make sure your organization’s name, address, federal and state employer identification numbers (EINs), and state unemployment account numbers are accurate.
Additionally, ask employees to confirm their full names, social security numbers, and addresses for accuracy. If you work with independent contractors who need an IRS 1099 form, confirm their names and EINs as well. Compare this information with what you currently have on file to ensure that employees and contractors receive the tax documents they need to file their taxes correctly.
Audit employee payment records: Get a head start on auditing payments that have been processed for your employees by reviewing elements such as employee wage amounts, benefits deductions, child support, garnishments, and other deductions, as well as any tax exemptions throughout the calendar year, for accuracy.
Verify ACA information: Reviewing your ACA details will ensure a smooth filing process for your 1094-C form with the IRS. Running a test filing to confirm that the IRS can accept your submission now will allow you to address any issues ahead of time.
Set up bonus payouts and next year's compensation: If your company offers annual bonuses paid out at the end of the year, make sure those have been submitted for payment and that the amounts are correct. As your organization sets budgets for the upcoming year, verify any state or local minimum wage rate increases and salary threshold changes that could affect exempt employees.
Identify and notify employees of any unused benefits that may expire: Your organization might offer a range of benefits, from paid time off to Flexible Spending Accounts (FSAs). Note any benefits that need to be paid out by the end of the year based on your company’s policy or applicable laws. Inform your employees of these deadlines so they can submit any final claims before year-end.
Check for eligible tax credits: As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Employee Retention Credit (ERC) is available for qualified organizations that retained employees during the government shutdown or experienced a significant decline in gross receipts during the first three quarters of 2021. This credit can be claimed retroactively. If your organization qualifies for the ERC for the 2021 tax period, the deadline is April 15, 2025.
Finalize wages, taxes, and benefits for the year: By this stage in your payroll preparation, you should have reviewed and made any necessary changes to wages, taxes, and benefits for the current year. However, performing a final sweep to ensure everything balances out is a best practice. When calculating summary numbers for your organization to use on year-end tax forms, include any benefits offered such as tuition reimbursement, stock options, paid time off, etc., in the employee’s income.
Checklist: Tasks to Complete After the Final Payroll of the Year
Once you’ve processed the final payroll of the year, you’re in the homestretch—just a few more important items to wrap up.
Send out W-2 forms to employees: After processing the last payroll for the current year, begin issuing W-2 forms to your employees. Regardless of the delivery method, W-2s must be received by employees by January 31 of the following calendar year.
File year-end taxes and deposit any owed amounts: Ensure your organization’s taxes are paid on time. The tax filing deadline for businesses is usually March 15, earlier than the individual tax filing deadline. 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 preparation plan for the next year: With the year-end payroll process complete, it’s time to look ahead to 2025. Pay close attention to all federal and company holidays that fall on weekdays so you can adjust your payroll processing dates accordingly.
Congratulations, you’ve made it! Although there are many steps involved in wrapping up your payroll at the end of the year, all that hard work will set you up for success in the new year.
If you’re not currently working with an HR or payroll technology provider, consider doing so in the year ahead. This can help automate some of these steps, bring greater visibility to any variances, and reduce the risk of fines and penalties for noncompliance.
