This year-end payroll checklist covers what to walk your small business clients through before and after their last payroll of the year: verifying employee and business information, running final payroll before December 31, distributing W-2s and 1099-NECs, and filing Form 940 and Form 941 on schedule.
How can I prepare my small business clients for end-of-year payroll?
The year-end payroll process may vary for each business based on size, industry and location. There are, however, many common steps to preparing a business for year-end payroll processing.
Share this year-end payroll checklist with your small business clients, and refine or add to it based on your relationship with them and their specific business.
Before the last pay period of the year:
- Verify business information. Ensure the information on file is accurate, including state and federal employer identification number (EIN) and other taxpayer identification numbers, state unemployment account number(s), and business name and address.
- Ask employees to review and confirm their personal information, including full name, address and Social Security number.
- Remind employees to check their W-4 to make sure it is up to date and reflects their preferred federal withholding. You can also share the IRS W-4 tax withholding estimator tool so they can estimate the withholding amount that works best for them in the new year.
- Plan for additional pay runs, including bonus and holiday checks.
- Estimate FUTA credit reduction, if applicable. FUTA tax is 6.0% on the first $7,000 of each employee’s wages. If eligible for the federal unemployment tax credit (generally available when state unemployment tax was paid in full and on time, in a state without a credit reduction), the credit can be as much as 5.4%, which could bring the effective rate down to 0.6%.
- Be aware of how Christmas and New Year's Day bank holidays may affect the payroll schedule.
- Run last payroll of the year before December 31.
- Review and update employee handbook policies.
After the final pay period of the year:
- Run a payroll summary report. Review payroll records and verify payroll tax withholdings, gross wages, net wages, deductions and other information needed for your clients' year-end financial reports.
- If you run payroll manually, you will need to order paper year end payroll forms. If you work with a full-service payroll provider, like SurePayroll® By Paychex, you’ll have to access the forms you need through your payroll account.
- Plan to complete and distribute W-2s to employees and 1099-NECs to contractors by January 31.
- Submit Form W-3 to the IRS, state’s revenue department and the Social Security Administration by January 31.
- Deposit and report FUTA (Federal Unemployment Tax Act) taxes.
- Deposit FICA taxes for the previous year.
- Before January 1, review and update tax rates and set any new wage base limits. This could include federal and state unemployment tax, Medicare, Social Security (also known as Old Age, Survivors and Disability Insurance or OASDI), and state employment taxes. The Social Security wage base is $192,300 for 2027, up from $184,500 in 2026. Medicare tax has no wage base limit, though wages above $200,000 ($250,000 for married filing jointly) are subject to an additional 0.9% Medicare tax.
- Update any employee earnings or deductions before the first pay period of the year.
- Review worker’s compensation coverage and payouts to assess premiums.
- Review or start a small business 401(k) retirement plan for employees.
- Any end-of-year payroll taxes you owe are usually due by March 15. Pay them online via the IRS’ electronic federal tax payment system (EFTPS).
S-corp 2% health insurance
If your client is set up as an S-corporation and they own more than 2% of the company’s stock, their health insurance benefit needs to be treated differently. An S-corp can provide health insurance to non-owner employees as a tax-free fringe benefit. However, if the company provides health insurance to employees, owners or shareholders that own more than 2% of stock in the S-corp, the IRS requires that cost to be included in the shareholder’s wages in Box 1 of their Form W-2, and taxed as income. When the plan covers all employees or a class of employees, the premiums are generally not included in Boxes 3 and 5.
If this hasn’t been recorded yet, make sure it’s entered in your client’s payroll account before year-end. A tax advisor can confirm how this applies to a specific client’s plan. More year-end S-Corp 2% health insurance information can be found on the IRS website.
What year-end payroll forms do small business owners need?
Small business owners may need several other year-end tax filings, most with a January 31 deadline. In addition to Form W-2 for employees and Form 1099-NEC for independent contractors, the following forms may also apply:
- Form W-3: This form summarizes all the W-2 information the business filed.
- Form 940: Use this form to report annual Federal Unemployment Tax (FUTA) liability.
- Form 941: The employer’s quarterly federal tax return reports income taxes, and Social Security and Medicare withheld from employees’ paychecks. You also use this form to pay the employer’s portion of Social Security or Medicare.
- Form 944: If the IRS has notified a small business that its annual payroll tax liability for Social Security, Medicare and federal income tax is $1,000 or less, it may be able to pay these taxes annually instead of filing quarterly.
- Form 1095-B: This form is used by self-insured small employers to provide information on any health insurance you provide employees. You will give a copy to the IRS and your employees.
Support for your small business clients
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This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up to date
