The end of the year is a busy time for business owners. There’s a lot to get in order before the start of the new year and it can be overwhelming. Year-end payroll reporting is one of the most important items to manage as it affects your team’s W-2 forms for the following tax season. To make things easier, we’ve put together the following end-of-year payroll checklist of all the payroll, compliance, tax information, and documentation you’ll need for your payroll reconciliation. Save the downloadable version to keep it handy as a reference.
Preparing for Year-end Payroll
Preparing all the necessary documentation before the new year will save you time and frustration during your end-of-year payroll procedures. Early preparation will ensure a smooth transition into the new year, allow you ample time to procure all documentation for tax compliance, and implement any year-end bonuses.
To Do Before the Last Payroll of the Calendar Year
- Review employee and employer data
- Verify your employee and employer data that is used when processing your quarterly tax reports and employee W-2s.
- Confirm which employees utilized company retirement plans.
- Confirm employee names and social security numbers are correct.
- Verify wage, benefit, and tax data
- Confirm employee contribution amounts to any benefits plans.
- Verify withholding information is correct for employees. This includes:
- Federal and state tax withholding
- Third-party sick pay
- Non-cash payments
- Verify other special tax items are updated and submitted, including
- Other compensation
- Third-party sick pay
- Employee business expense reimbursements
- Taxable fringe benefits
- Dependent care benefits
- Check for special procedures
- Schedule any special bonus payrolls.
- Request any special reports needed for year-end.
- Confirm whether all adjustments are applied or schedule an adjustment payroll.
To Do After Your Last Payroll of the Calendar Year
- Check employee and employer data
- Review any discrepancies in employee data such as missing addresses or invalid social security numbers.
- Review data for any employees who were terminated during the calendar year. They will receive W-2s from your organization, so you’ll need to ensure their payroll data is accurate or needs to be adjusted.
- Check wage, benefit, and tax data
- Review discrepancies such as negative quarter and/or year-to-date fields, and qualified pension coding discrepancies.
- Verify the employer’s new state unemployment insurance tax rate and taxable wage limit for each state where the employer has workers.
- Verify new state disability insurance rate and taxable wage limit, where applicable.
- Test accuracy of Social Security tax withholding (multiply total wages less excess wages by 6.2%).
- Check the accuracy of employer’s matching Social Security tax.
- Test accuracy of Medicare withholding (multiply total wages by 1.45%).
- Double-check the accuracy of the employer’s matching Medicare tax.
- Test the accuracy of state unemployment insurance tax (verify taxable wages and multiply by the employer experience rate).
- Compare payroll register totals to W-3 totals.
- Make sure reported tax totals from W-3 match your totals from Forms 941
- Check for any excess contributions to retirement plans.
- Ensure any changes employees made regarding their W-4s or benefits deductions are implemented for the new year.
Review Employee Compensation and Benefits
When preparing for year-end, it’s important to review all employee compensation and benefits data for any errors. The payroll data from the end of the year will be included in your employees’ W-2s so it’s imperative that you verify total compensation, federal tax withholding, state withholding, and all benefits contributions for the year.
Many employers choose to include year-end bonuses, both discretionary and non-discretionary. They can either be built into compensation plans, like meeting a specific work-related goal (non-discretionary) or distributed on special occasions like holidays (discretionary). Bonuses are considered taxable income by the Internal Revenue Service (IRS) which means they get added to your employee’s total earned income for the year. Employers can process the year-end bonus amount as a separate payroll or included with the final payroll of the year.
Regarding benefits, the end of the year is a popular time for employees to make any changes to their information. As the employer, you’ll need to make sure all employee data is updated in your systems properly, especially for tax and benefits purposes.
Tax Reporting and Withholding
The end of the year is an important time for taxes and tax preparation. After you close your final payroll for the year, you’ll need to prepare W-2s for your employees, issue any 1099s to independent contractors, file your Form 941 by January 31, file your Form 940 (annual, end-of-year payroll tax summary of all Form 941s) by January 31, and remit any tax payments to employer unemployment and withholding (FICA and FUTA).
End-of-Year Payroll Reconciliation and Reports
After you process your final payroll, you’ll want to pull end-of-year payroll reports—also called an annual payroll register—and check this against all the information included in To Do After Your Final Payroll section. You’ll want to make sure all taxes and deductions are correct for employees, as well as compensation, and if any revisions are needed, you’ll want to process and adjust payroll. Pulling an annual payroll register is much simpler if you are using a payroll processing platform or service. These reports can be automated and produced immediately after each payroll closes. You’ll check your payroll reports against your Form 940 and W-3.
Compliance and Year-end Deadlines
It’s important to make sure you’re processing payroll in compliance with all labor laws—state and federal—at any point during the year. Year-end payroll is no different. Many states require paid sick leave and benefits under the Family Medical Leave Act (FMLA), so you’ll want to review your final payroll and verify every employee accrued or received the proper amount of sick pay and disability in accordance with state and federal requirements. To avoid any pitfalls with compliance, check with your human resource department on the most up-to-date state and federal requirements and make all necessary adjustments for the new year.
Employee Records and Documentation
Keeping accurate records of employee data—specifically payroll data—is essential. Not only does this help employees discover any possible discrepancies in their tax deductions, but it also helps both employee and employer in the event of wage claims or unemployment claims. If you had any employees leave your company during the year, you’ll want to make sure the W-2 you provide them with matches the payroll records you have for their time with you.
Security and Data Protection
The end of the year is a higher risk for sensitive data to be hacked and stolen. With everyone prepping for the upcoming tax season, social security numbers and bank account information are at higher risk. Try not to email employee data and if you absolutely must, be sure to use encrypted emails. Remind employees not to share their log-in information for their employee portals or access their information on an unsecured network. Payroll and HR staff should only be accessing data on the company network or VPN and should not be copying/pasting or emailing sensitive documents without encryption.
End-of-year payroll processing can be more involved than other payrolls throughout the year and downloading this end-of-year payroll checklist can help get you started.
But whether you’re adding bonus payrolls, processing payroll adjustments, or reconciling all reports for the next tax season, VensureHR can help alleviate some of these burdens. Through our payroll service, all payroll data is housed in a central location that you can access and generate any reports you need.
Our payroll experts will ensure your payrolls are set up accurately and all tax and benefits deductions are calculated correctly, avoiding the possibility of making major corrections at the end of the year. Schedule a call with us to learn more.