Year-end payroll processing is often a daunting task for business owners and accounting staff. Closing out the books can present challenges due to last-minute transactions, holiday breaks, and the absence of key personnel. However, failing to meet year-end payroll deadlines can result in costly penalties and unnecessary stress.
To ease the process, it’s essential to plan for payroll compliance tasks such as bonuses, tax filings, and employee documentation. By following a structured approach, you can close the books efficiently and start fresh in January.
Here’s our Year-End Payroll Checklist to help you streamline the process.
Verifying employee information is critical to avoid payroll issues. Ensure all identifying details, such as names, addresses, and Social Security numbers, are accurate. This is particularly important as changes due to moving, marriage, or even identity theft can lead to complications.
Failure to update employee details could delay payroll processing and lead to incorrect tax withholdings, particularly when employees relocate and trigger changes in local or state tax requirements.
Pro Tip: Send a year-end communication to all employees asking them to update their W-4 forms if they wish to adjust their withholdings for the new year. This simple step can prevent future payroll issues.
Reconciling payroll accounts at year-end ensures compliance with wage and hour regulations. Business owners should verify two key areas: wages and salaries paid and the hours each employee worked.
Review wages logged through timesheets or a time management system to confirm that every employee has been paid correctly. Additionally, verify overtime, sick pay, and paid time off. This process may require cross-checking with department managers for accuracy.
Also, don’t forget to review payroll deductions, including benefits, tax withholdings, and wage garnishments (e.g., child support).
Once all wage, tax, and deduction data are verified, it’s time to prepare year-end tax forms. Forms such as W-2s and 1099-NEC must be filed with tax authorities and sent to employees by January 31.
While this task can be deferred until the new year, it’s wise to set up a system for generating these forms in advance to avoid last-minute delays. Consider using a payroll system like Payroll Freedom for bulk form filing, which simplifies and automates the process.
Tax laws and payroll regulations change annually. Before processing payroll in the new year, confirm that new tax rates and wage regulations are updated in your payroll system. This includes federal, state, and local tax updates that could affect your employees' paychecks.
Ignoring these updates can lead to fines or incorrect pay for employees, so staying compliant is crucial.
When processing the final payroll for the year, ensure all bonuses are taxed correctly. Many employers mistakenly issue bonuses using a 1099 form, which is incorrect if the recipient is a W-2 employee.
For companies with retirement plans such as 401(k)s, verify that contributions are appropriately deducted from bonuses and year-end payouts.
Also, be mindful of holiday gifts or bonuses with cash value, as these may be subject to taxation. Applying the correct tax rates to these payments is essential for compliance.
Ensure all final payroll reports, such as employer quarterly tax filings and unemployment reports, are submitted on time. Double-check all figures for accuracy before filing with the appropriate state and federal agencies.
Missing a deadline or submitting incorrect reports can lead to penalties, so prioritize accuracy and timeliness in your year-end submissions.
Under federal law, employers are required to retain payroll records for at least three years for the Department of Labor and four years for IRS purposes. Ensure that your records are securely stored and easily accessible in case of an audit.
Consider digital archiving through payroll software or cloud-based systems, which offer secure and convenient record storage.
Year-end payroll can be a stressful time for businesses, but Payroll Freedom provides the expertise and solutions needed to simplify the process. Our payroll experts help you stay compliant, increase efficiency, and improve employee satisfaction by tailoring payroll solutions to your specific needs.
Download Payroll Freedom’s Year-End Payroll Checklist to help ensure a smooth payroll close-out and streamline your entire payroll process.