From monthly financial obligations to quarterly tax deadlines to annual strategic planning milestones, the calendar of a small business owner brims with important dates.
If your calendar doesn’t show payroll year-end reporting, it’s time to add this important task. But what is year-end payroll?
Year-end payroll refers to the series of tasks that need to be completed at the end of the financial year. This includes:
- Preparing year end payroll reports.
- Finalizing payroll for the year.
- Distributing year-end forms.
- Filing necessary reports to tax authorities by the payroll submission deadline.
A well-structured year-end process helps you ensure that your business remains compliant with federal, state, and local tax regulations.
Included in year end payroll is determining the year-to-date payroll, or the total amount of wages paid to an employee from the start of the year through the last full payroll period in the year. This figure is important for calculating year-end tax withholdings and ensuring accurate reporting on forms like the W-2.
Many business owners face challenges during payroll year-end. They struggle with time limits, complex tax codes, and making sure reports are accurate. Overcoming these challenges requires proper planning and the use of reliable tools. Being aware of potential pitfalls can help in developing strategies to tackle them effectively.
This guide provides a year-end payroll checklist to help make your year-end payroll process smooth and efficient. It explains important terms like payroll end date and year-to-date payroll. It also outlines important deadlines and forms.
Understanding End-Year Payroll
Year-end payroll is a crucial process that aligns financial activities related to employee compensation, tax regulations, and compliance. It also helps set the foundation for financial planning for the next year. Properly executed year-end payroll provides a clear financial picture that aids in strategic decision-making.
Even if you know a lot about year-end payroll, it’s easy to miss important steps, whether completing your first or 50th year end. Missing important steps can happen more often at two key times: the last payroll of the year and the first payroll of the new year.
An organized year-end payroll checklist can help ensure you don't overlook any significant steps in the process. Here’s a few key deadlines to help keep you on track:
- December 31: Finalize payroll for the year.
- January 31: Distribute W-2 forms to employees and 1099-NEC forms to independent contractors. Submit forms to the IRS.
- January 31: Submit Form W-3 to the IRS, your state’s revenue department, and the Social Security Administration.
- February 28: File Form 1099-MISC.
End-of-year payroll activities include calculating and filing federal, state, and local taxes. Businesses can avoid penalties or legal issues from missed deadlines or errors by closing payroll, issuing all relevant tax forms, and reconciling accounts accurately and on time. In addition to compliance, the end-of-year payroll provides financial clarity.
End-of-year payroll differs from year to date for payroll. End-of-year refers to cumulative payroll information from January 1 to December 31. Year-to-date summarizes payroll-related data for a specific period, often the beginning of the calendar or fiscal year to the most recent pay period. This important financial metric includes income, deductions, and taxes for employees, and represents the total earnings made by all employees for a business.
By closing the year with accurate records, you can confidently plan for the next fiscal year, aligning your budget and financial goals. Payroll accuracy supports your business and employees' tax planning while setting you up for a clean start in the new year.
Checklist Before the Last Pay Period of the Year
The year-end payroll process involves several components, including tax calculations, employee earnings, and employee benefits. Each component requires careful attention to detail to ensure accuracy. Understanding each part of the process helps manage the overall payroll process efficiently.
Year-end payroll figures are essential for accurate reporting on year-end forms such as W-2s and 1099s. These figures provide a comprehensive overview of an employee's earnings, critical for tax purposes. Ensuring these numbers are correct helps avoid discrepancies and potential audits.
Some small business owners wonder what is payroll end date? The payroll end date is the last day of a pay period. It is also the final date to enter payroll information for that period. It differs from the pay date, which is the day employees receive their pay. It is also different from year end paystub, or a comprehensive record of employee earnings and deductions over the year.
To help make the year-end payroll process more manageable, follow this checklist.
Verify Business Information
Ensure the business information on file is accurate, including your state and federal employer identification number (EIN), state unemployment account number(s), and your business name and address.
Review Employee Information
Confirm all employee information, including names, addresses, Social Security numbers, and tax withholdings. Also 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 this free salary paycheck calculator so employees can estimate the withholding amount that works best for them in the new year.
Verify Payroll Data
Review employee wages, benefits, bonuses, deductions, and reimbursements to confirm each amount was accurately recorded throughout the year. Also check employee PTO, tax filing status and work status for any discrepancies.
Audit Payroll Records
It’s key to audit payroll records at year end—and throughout the year—to help ensure your compliance with tax laws. Check that all hours worked are accounted for, employees are paid correctly, deductions and reports are accurate, and all business and employee information is current. A payroll record audit also helps identify trends and areas for improvement in payroll processing efficiency and accuracy.
Confirm Payment Methods
Verify payroll schedules and details concerning an employee’s preferred payment method (e.g., direct deposit).
Ensure Accurate Tax Withholding
Confirm proper state and federal tax deductions.
Reconcile Payroll Reports
Match payroll records with bank statements and accounting records.
Process Any Year-End Adjustments
Account for final reimbursements, bonuses, or benefit deductions.
Close Out Payroll for the Year
Run your last payroll of the year before December 31. Also run a final payroll for outstanding payments.
Year end is a good time to update your payroll system for the new year. This includes adjusting tax rates and limits, as well as any changes to employee benefits or deductions.
Before running the last pay period of the year take a moment to consider the following:
- Additional payroll runs, including bonus and holiday checks.
- Your FUTA credit reduction, if applicable.
- How Christmas and New Year's Day bank holidays may affect your payroll schedule.
- Review your payroll schedule for the new year.
- Review and update your employee handbook policies.
What Key End-of-Year Tax Forms Do I Need?
Understanding the purpose and requirements of different year-end federal, state, and local tax forms is essential for compliance. Each form serves a specific function in reporting earnings and withholdings to the government. Familiarity with these forms ensures accurate and timely submissions.
In addition to Forms W-2 for employees and 1099-NEC for contractors, small business owners may also need to complete and submit the following year-end payroll tax forms. What are the end of year payroll forms? Read on.
W-3
Form W-3 summarizes and transmits W-2 Forms to the IRS and Social Security Administration. The form reports total employee wages, taxable wages, and taxes held throughout the year.
1095-B
Self-insured small employers use Form 1095-B to provide information on any health insurance they offer employees. You will give a copy to the IRS and your employees.
941 / 940 Forms
Use Form 940 to report your annual Federal Unemployment Tax (FUTA) liability.
Form 941 is 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 your annual payroll taxes for Social Security, Medicare and federal income tax is $1,000 or less, you might be able to pay them annually with Form 944.
State-Specific Tax Forms
States require small businesses to file information with their state income tax. Each state has its own set of forms, available on the state's official tax website. Completing state-specific forms is important to help ensure compliance with local tax authorities.
W-2 Forms
The W-2 form is an end-of-the-year tax form for most businesses. It gives a summary of an employee's earnings and taxes taken out. This information is important for tax filing and IRS rules.
Employers must file a W-2 for each employee who received $600 or more in wages, tips, or other compensation in a year. W-2 forms must be distributed to employees by the January 31 deadline. Providing electronic or paper copies ensures employees have the necessary information for tax filing.
Proper preparation and distribution of W-2s are vital for year-end payroll. Preparing the W-2 form involves collecting accurate payroll data, verifying employee information, and ensuring correct calculations. Following a systematic approach to preparation ensures accuracy. Utilizing payroll software can streamline this process significantly.
Checklist After the Final Pay Period of the Year
One of the most critical junctures with year-end payroll is the final payroll of the calendar year. Another—and equally important juncture—is the first payroll of the new calendar year.
You can finish some parts of the payroll year-end checklist early. However, important steps happen after the last payroll period of the year. Once you calculate your final payroll period, do the following.
Update Tax Rates and Deductions
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. Overall, you’re prepping to ensure compliance with the upcoming year’s regulations.
[H3] Review Payroll Compliance
Check for updates in state and federal payroll laws, including:
- Worker’s compensation coverage and payouts to assess your premiums.
- Review or start a small business 401(k) retirement plan for your employees.
Adjust Payroll Software Settings
Ensure payroll software reflects the latest tax rates and deductions. Also take time to update any employee earnings or deductions before processing the first payroll of the year.
This is also a great time to review your company’s policy on the treatment of earned but unused time off benefits. If your employees' time off benefits are calculated on the calendar year and you follow a use-them-or-lose-them approach to time off, those benefits reset at the start of the new calendar year. This means employees typically forfeit any earned but unused time off.
If your policy allows employees to roll over any unused time to the next year, you will want to validate this happened. If your time-off policy sets specific limits on how much unused time off can be carried over or a time limit to use that time off, you may need to make updates for all or certain employees per your time-off policy.
Schedule Payroll Audits
Yes, your calendar is busy. And it fills quickly.
Year end is a great time to schedule payroll audits for the new year and to assess if your current process still works well. If not, explore the necessary changes.
If you don’t currently have a payroll audit process, consider doing so now. A structured payroll audit helps support record accuracy, identify potential development areas, and correct any discrepancies.
Avoiding Common Payroll Year-End Mistakes
Avoiding common mistakes in payroll tax form preparation requires a keen eye, ample preparation, and solid organization. Using an automated payroll platform like SurePayroll® By Paychex can help simplify this process.
Common mistakes in calculating year-to-date payroll include overlooking bonuses, miscalculating deductions, and failing to update records. Preventing these mistakes requires diligent record-keeping and regular reconciliation of payroll data. Implementing checks and balances within the payroll process can also help mitigate errors.
Missing Tax Filing Deadlines
Meeting payroll reporting deadlines is crucial to avoid penalties and ensure compliance. Plus, employees expect timely and accurate processing of their wages; any delay can contribute to dissatisfaction.
Keeping a calendar of submission deadlines and setting reminders can help in managing this aspect effectively. Timely submissions reflect well on your business's organizational capabilities. Be sure to compile and submit payroll reports to the appropriate tax authorities by the specified deadlines. This includes the W-3 form, which summarizes all W-2 forms for the Social Security Administration.
Incorrect Employee Data
Double-check employee information to prevent errors. Verify all entries and establish (or continue) open communication with employees about the personal information update process.
Failing to Reconcile Payroll Records
Payroll reports include various documents required for compliance with tax regulations, such as W-2s, W-3s, and 941s. Each report serves a specific purpose in detailing payroll activities. Understanding these reports ensures accurate and timely submission. It’s key to match payroll records with financial statements.
Overlooking Benefit Contributions and Deductions
Verify all withholdings and contributions are correct.
Practical Tips for a Smooth Year-End
Consider these tips to help you complete a smooth year-end payroll process.
- Plan Ahead. Preparation is the cornerstone of a successful year-end payroll process. A well-organized approach ensures you complete all tasks accurately and on time. Start preparing for year-end tasks early to avoid last-minute stress. Regular reviews and audits help maintain data integrity and adherence to regulations. Focusing on these aspects reduces the risk of errors and penalties.
- Stay Informed. Keep up to date with any changes in tax laws or payroll regulations. Regularly review updates from tax authorities and industry sources.
- Leverage Resources & Tools. Calendars, reminders, and other tools send automated alerts for upcoming deadlines, ensuring that nothing gets missed. Investing in reliable technology streamlines deadline management.
- Seek Professional Help. Investing in expert help—whether with technology or a human—can help save time and reduce errors. An automated payroll system or a CPA, accountant or bookkeeper can support accuracy and compliance, particularly for businesses with limited payroll expertise.
Conclusion
Completing the year-end payroll process doesn't have to be daunting.
With a clear checklist, understanding of key deadlines and forms, and the right tools, you can manage the process efficiently. Plus, by staying organized and proactive, you'll support regulatory compliance.
A good year-end payroll process also helps set up the next year, supports business operations, and contributes to employee satisfaction.
Using tools and software designed for payroll management can simplify report submission. These tools automate the reporting process, helping reduce errors and save time. Investing in reliable software is a strategic decision for efficient payroll management.
Whether you own a small business or manage payroll for a big company, this information presented in this article will help you better prepare for year-end payroll. Remember, the key to a stress-free year-end is preparation, accuracy, and timely submission of reports and forms.
Simplify Year-End Payroll
You’re an expert in your field. You don’t need to be one in payroll and payroll tax management. The right payroll service provider can help you stay focused on your business, customers and employees.
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