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End-of-Year Payroll Checklist for Small Businesses

Many small businesses struggle to close out the payroll year smoothly: managing tax filing, wage reporting, record-keeping, compliance, and audit preparation alongside important day-to-day operations.

As your own business prepares to process the last payroll of the calendar year, it’s an ideal time to review year-to-date payroll reports and make any necessary compensation, benefits, or compliance-related changes that need to take effect in the new year.

To support you with this process, we’ve created a comprehensive end-of-year payroll checklist outlining the 7 key steps your business can take to responsibly manage your final payroll cycle, prepare for the first cycle of the New Year, and leverage reporting and tax preparation tools to avoid unexpected fines and delays.

Download Your Free Year-End Payroll Checklist to ensure a smooth payroll close-out.

1. Review Employee Information and Records

To safeguard against future tax and payroll issues, it’s essential to confirm your company and employee information before the end of year.

When an employee’s name, SSN, address, phone number, worker status, or filing status is out of date, this often leads to unreceived W-2s, penalties from the IRS, or costly filing delays. Issues with employee details can also trigger tax issues at local and state levels, especially due to an address change, improper employee coding, or improper final pay for a deceased employee. 

To avoid payroll processing issues and tax penalties, remember to send an organization-wide communication before the end of the year, requesting that employees review their Form W-4 and make any necessary adjustments before the new year.

Adapting to New Payroll Regulations What Businesses Need to Know

2. Reconcile Payroll Accounts

The next key step in year-end payroll processing is to reconcile your business’ payroll accounts with any local, state, or federal wage and hour regulations before the year is over. 

Whether you already use a time management system that integrates with HR- & payroll-related tasks, or rely on manual timesheets, you’ll need to confirm that each employee has been paid correctly and year-to-date payment aligns with their wage or salary structure. As you calculate wages or salaries paid, also remember to confirm the accuracy of overtime, PTO, and sick pay data.

Finally, you’ll need to review all payroll deductions, which could include benefits, wage garnishment, tax withholdings, and more. 

3. Process Year-End Tax Forms (W-2s, 1099s, etc.)

Once payroll is reconciled, it’s time to begin processing a host of year-end tax forms, including W-2s, 1099s, and any other records of paid taxes and wage earnings. Most small businesses will also need to prepare and file the following payroll tax forms:

  • Form 940 – Used for paying your business’ Federal Unemployment tax (FUTA) liability
  • Form 941 – Quarterly form used to report the employee payroll taxes you’ve collected for federal income, Medicare, and social security.
  • Form 1095-B – Used to report the healthcare benefits you’ve provided to employees.

You must provide W-2s and 1099s to your team (employees and contractors) by January 31st and submit these forms to the Social Security Administration (SSA) by the same date. In some jurisdictions, it’s also necessary to file these forms at the local and/or state level. All W-2s sent to the SSA should be accompanied by a W-3 form, which summarizes W-2 information.

End of year Checklist (3)-1

Are you struggling to efficiently prepare W-2s, 1099s, and other payroll tax forms for your entire workforce?

Payroll Freedom offers timely and cost-effective bulk form filing to ensure your year-end tax forms arrive on time for your employees, and fulfill local, state, and federal tax obligations.

Tax-Saving Moves to Make Before the Year Ends-1

4. Update Payroll Tax Rates and Limits for the New Year

Staying up to date with local, state, and federal tax changes is a crucial step towards ensuring long-term compliance for your business. Although continuous (real-time) compliance monitoring protects your organization year-round, the end of the year is the highest-priority period for reviewing and adapting to any new tax rates, wage regulations, or labor laws that will impact your organization. 

Whether it’s minimum wage increases, payroll tax limit adjustments, or another change, if your business fails to adapt to required updates, it could lead to penalties, inaccurate pay for your employees, and create cascading issues affecting employee retention and organizational reputation. Since many payroll tax rate and limit changes (including wage increases) become effective January 1st, be sure to make any necessary compensation changes before the start of the new year.

5. Final Payroll and Bonus Runs

Many businesses struggle to navigate year-end bonuses, including how to properly issue them, determine whether they are subject to taxation, and understand how they impact retirement contributions.

Here are some common errors to avoid:
  • Issuing a bonus using Form 1099, which is the incorrect approach with a W-2 employee

  • Failing to deduct retirement contributions from an employee’s bonus or year-end payout

  • Failing to apply correct (or any) tax rate to bonuses or holiday gifts with cash value

  • Deducting bonuses in the wrong year or timeline; there are different requirements for cash-basis vs. accrual-basis businesses

  • Failing to calculate nondiscretionary bonuses to nonexempt employees for any overtime pay owed during a bonus period (an FLSA requirement).
Beneficial Ownership Information Reporting Key Requirements and Deadlines-1

6. File Year-End Reports

Towards the end of each year, your business will need to produce and submit a number of final payroll reports to the IRS and other local or state agencies. It’s essential to verify the accuracy of the data in each of the reports before submitting, and to be mindful of the varied deadlines for each report type to avoid penalties. Other year-end reports are valuable sources of historical data that can help inform employee and organizational decision-making for the upcoming year. Below are just some of the year-end reports you should generate before the close of the year.

  • A Payroll Summary Report – If you’re using a qualified digital payroll platform, you can easily generate a payroll report spanning the date range of January 1st to December 31st, which gives you access to a yearly summary that details deductions, tax withholdings, gross & net wages, and other important payroll information. 

  • Employee Summary Report(s) – Like a payroll summary report, an employee summary report gives you comprehensive access to wages, deductions, and tax withholdings, but the data is specific to each individual employee or contractor.
    Retirement Contributions Report(s) – This type of report allows each member of your team to review the year’s employer and employee contributions to retirement accounts and make adjustments to next year’s contribution amounts.

  • PTO Report – A PTO report allows you to evaluate remaining hours of PTO and paid-out PTO per employee to bypass future staffing issues. 

  • Workers’ Comp Report – If one or more of your employees received workers’ compensation from your business during the year, this report can be used by your insurance provider to reassess and potentially alter your premiums for the following year.

7. Archive Payroll Records

For most businesses, it’s advisable to retain payroll records for at least four years after fourth-quarter filing to remain compliant with Department of Labor recordkeeping requirements (at least three years) and IRS requirements (at least four years). Of course, when payroll records are stored using a paper- or spreadsheet-based approach, this can pose a number of issues if they need to be accessed quickly and reliably at a later date.

Payroll Freedom’s digital payroll platform includes secure, accessible record-keeping through cloud-based digital archiving. This approach allows you to access and retrieve accurate digital payroll records at any time.

How Payroll Freedom Can Help

Navigating year-end tax filings and year-round payroll is a daunting task for small businesses without professional support and the right technology in their corner. That’s why Payroll Freedom offers comprehensive payroll, compliance, and tax support through all of the following services:

  • Streamlined payroll processing & tax filing
  • An integrated HR system to manage employee documents, payroll records, and more
  • Year-End Administration support (generating W-2s, bulk form filing, and more)
  • Implementation of direct deposit, pay cards, or printed checks + access to a mobile Employee Self-Service (ESS) portal
  • Compliance monitoring to ensure alignment with local, state, federal, and industry-specific regulations
  • General Ledger and Accounting support


Additionally, all of Payroll Freedom’s payroll and tax services are designed to seamlessly integrate with our related HR tools to help you digitally manage time and attendance, improve talent acquisition, and manage retirement and benefits.


Ready to simplify your year-end tax, compliance, and payroll tasks? Contact us today to start the process.

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