It’s exciting to prepare for the new year, and you might be tempted to keep looking forward. But, as a business owner, you need to close out each year properly, especially with regards to payroll.
There are several year-end payroll requirements mandated by the Internal Revenue Service (IRS) you need to meet each year to prepare for taxes and start the next year right.
So, what exactly should you include on your year-end payroll checklist? Keep reading to find out the steps you need to take before the year ends and before the first payroll of the next year.
Year-End Payroll Requirements
To prepare your business and your employees for tax season, you need to review and verify your financial information before the year ends. It’s also important to review relevant tax documents to make sure you track all payments correctly in the new year. Finally, you also want to review any changes to state and federal employment regulations that affect your business in the new year.
Use the lists below to create your year-end payroll checklist and meet all the required filings.
Year-End Payroll Checklist: Before the Year Ends
In addition to sending out your final payroll, you need to verify several items at year-end. Follow along with these steps to ensure your business is prepared to close out the calendar year and get ready for tax season.
How to Prepare for Taxes
- Verify your tax identification numbers and business address. The first step on your year-end payroll checklist is to verify your business’s information for tax purposes. In particular, you should verify your state and federal Employer Identification Number (EIN) and ensure your company name and address are accurate. You’ll also need your state unemployment account number.
- Confirm employee contact information. You need to ensure that the contact information for all of your employees and contractors is correct. This includes each person’s name, social security number, filing status, number of exemptions, and address. Misspelled employee names or incorrect social security numbers (SSNs) can result in tax penalties.
- Verify that all paychecks were recorded. All the paychecks you issued throughout the year need to be accounted for. If you use software for your payroll system, usually, this will be done automatically for you. Remember, you need to record any handwritten or voided checks in your records.
- Double-check employee wages and benefits. Review your payroll software or records as part of your year-end payroll checklist. Verify that employee wages, benefits, and deductions are accurate. In particular, ensure you have the correct pay rate if you use payroll software. You also need to verify year-to-date wages, year-to-date taxes, and total pre-tax earnings.
- Report fringe benefits (if you offer them). Fringe benefits such as company cars, stock options, and reimbursement for health insurance spending might be taxable. Before the current year ends, you must report fringe benefits under employee earnings. Learn more about fringe benefits with IRS Publication 15-B.
- Order W-2 and W-3 forms. You must file a W-2 form for each of your employees. You can find these forms on the IRS website or file electronically through Social Security’s Business Services Online (BSO) website. Alternatively, you can use payroll software to file W-2s online. Your W-3 form is filed along with W-2 forms and gives the IRS the total amount you paid to employees.
- Ask employees to review withholding allowances. Before the new year begins, have all your employees check their tax forms and confirm federal and state withholding allowances. Federal income tax withholding is reported on Form W-4.
- See if you need to file an Affordable Care Act (ACA) report. The ACA added health coverage reporting requirements for certain employers. If you have more than 50 employees or your business is self-insured, you must file a form 1095 with the IRS as proof that you offered health coverage. Self-insured small businesses must file a 1095-B form, and employers with more than 50 employees must file a 1095-C form.
- Review tax deposit schedule for the next year. Federal income taxes and Federal Insurance Contributions Act (FICA) taxes must be paid either monthly or semiweekly. You should review this every year, as it is subject to change. Your tax liability amount during the lookback period determines your deposit schedule. Check tax rates for income tax and Medicare taxes on the IRS website.
Process Your Payroll
- Run the last payroll. Run your last payroll of the year before December 31. Processing payroll after December 31st can result in a penalty or interest charge. Bonus and off-cycle payrolls should also be processed before December 31.
- Process bonuses. If you pay year-end bonuses, these need to be processed and scheduled before December 31. If you add bonuses to your regular payroll, they’ll be taxed at the regular rate. Otherwise, you can pay bonuses on a separate check, which is taxed at a flat rate of 22%.
- Review retirement plan catch-up contributions (if your employees use them). Regular retirement and catch-up plan deductions are automatically taken out of the first paycheck of the new year. If any employees want to stop catch-up deductions, include these requests on your year-end payroll checklist.
- Review your state’s minimum wage. If you pay minimum wage rates, check to see if your state has raised its minimum wage. Minimum wage rates are available on the Department of Labor website. If necessary, you may need to update pay rates for employees in the new year.
- Update compliance posters. For some employers, federal law mandates that labor law compliance posters are updated and placed somewhere all employees can see them. You can use the Department of Labor (DOL) elaws Poster Advisor to view your posting requirements. Failure to update and place compliance posters appropriately can result in penalties, fines, or even a lawsuit, so include updating them in your year-end payroll checklist. If you are required to post any signs, they are available to download at no cost on the DOL website.
Year-End Payroll Checklist: After the New Year Begins
Your year-end payroll checklist doesn’t stop at the new year. There are a few critical tasks to complete before you send out the first payroll of the new year. Furthermore, January also brings several key tax deadlines.
Keep reading to see what payroll tasks need to be completed after the new year begins.
Update Payroll Information
- Adjust and verify pay rates. Before the first paychecks of the new year go out, make sure each employee’s pay rate is accurate. This step is especially important if you gave raises based on performance or minimum wage law changes.
- Adjust and verify employee deductions. Ask your employees to review their deductions at the beginning of the year. These include medical, dental, life insurance, and any other voluntary deduction. Ensure any change requests are made before the first paychecks go out.
- Check 401(k) deduction limits. Retirement deduction limits often change each year. Review the new deduction limits, and adjust accordingly for each employee.
- Distribute W-2 forms by January 31. You must file all of your W-2 forms and distribute them to employees by the January 31 due date. If you use payroll software, you can e-file your forms.
- Distribute 1099 forms by January 31 (if applicable). If you paid any non-employees during the last year, you must record the payments on a 1099 form. Payments recorded on a 1099 form include payments to freelancers or independent contractors on the 1099-NEC form. Like Form W-2, 1099s must be distributed by January 31.
- File Form 940 by January 31. According to the Federal Unemployment Tax Act (FUTA), employers must pay 6% payroll taxes on employee wages over $7,000. These payments are recorded on Form 940. You may be eligible for a FUTA tax credit if your State Unemployment Tax Act (SUTA) payments were made on time.
- File Form 941 or 944 by January 31. Businesses that pay wages must file Form 941 or Form 944 to report employment taxes each quarter. Most companies will end up filing the 941, although some small organizations file Form 944. Check IRS regulations to see which form is appropriate for your business.
- Obtain new W-4 forms (if applicable). Check to see if your state updated its state W-4 form. If there is a new form, you need to obtain copies for your employees. You can view W-4 forms on the IRS website. You also need to get the new version of the Federal W-4.
- Review state unemployment changes. Check your state’s website to see if any modifications were made to unemployment insurance regulations. You may also want to review the Unemployment Insurance Relief plans issued due to the 2020 pandemic.
- Review state paid leave and medical leave rates. Check your state’s rate for paid leave and medical leave to ensure you stay compliant in the new year. Your state dictates employee eligibility, reasons for paid leave, and the maximum length of required paid leave.
Tips for Smooth Year-End Payroll Processing
Here are a few tips to ensure your year-end payroll processing goes smoothly.
Keep Accurate Records Throughout the Year
Year-end payroll requires several verification steps. Ensure you keep accurate records during the year, so you don’t have to recalculate and re-verify paycheck amounts.
Make sure all of your employees are correctly classified. Use time-tracking software to keep and record employee hours accurately. Apps standardize the time-tracking process and help prevent human error.
Finally, don’t wait until year-end to check on your payroll numbers. Schedule quarterly audits to make sure your books are correct.
Use Payroll Software
Using payroll software makes it easy to schedule paychecks and keep accurate records. Your payroll software can help automate tasks, like sending W-2s to employees.
Find payroll software that can automate paycheck scheduling and tax form preparation.
Remember, the IRS requires you to keep payroll records for two to four years for audit purposes or in case of legal action. So, even after you’ve completed your year-end payroll checklist, digital records come in handy.
Time-tracking and payroll software are excellent tools to help ease year-end payroll stress, but that’s not all. An accurate time-tracking solution keeps your employees happy throughout the year and empowers you to avoid paycheck disputes.
Create a Year-End Payroll Checklist
As a business owner, you have a lot on your plate. It’s a challenge to have to start your annual payroll process over again each year.
Instead, create a year-end payroll checklist that you can consult and work through each year. Include all required steps, plus the items that apply to your business.
Using the same system each year saves time and ensures you meet all year-end payroll requirements.
Consult an Accountant
Tax laws change frequently. Rules for deductions fluctuate, and new deductions often appear. If your business grows or undergoes changes throughout the year, you may qualify for tax credits or deductions.
For help managing payroll deductions, work with a Certified Public Accountant (CPA). A professional can help you avoid penalties and maximize tax deductions.
If you don’t already have an accountant, you can find a directory on the American Institute of Certified Public Accountants website. Alternatively, you can see if your tax software offers CPA consulting hours or ask your business colleagues for a reference.
Get Started Early
Don’t wait until the last minute to verify your year-end payroll information. Give yourself a head-start, so you don’t rush or make mistakes. When it comes to taxes, mistakes can be costly.
You can find your EIN, verify employee information, and compile written and voided checks as early as October.
When you start early, you give yourself more time to deal with any complications or surprises you might find along the way.
Let’s Wrap It Up: Year-End Payroll Checklist
While the end of the year is often cause for celebration, it’s also a hectic time for employers and business owners.
You have to meet several federal requirements and make sure your books are in order in time for tax season. On top of that, you still have to run regular payroll and potentially send out bonuses and raises.
If you want to keep the IRS and your employees happy while you manage your year-end payroll tasks, then make sure you use a thorough checklist.
For more information on payroll software with time-tracking, check out Hourly today.