As the year draws to a close, businesses everywhere begin the process of wrapping up their financials, preparing for taxes, and ensuring their payroll records are in order. This is a crucial time for an end of year payroll checklist, and getting everything right will set the stage for a smooth start to the new year. Whether you’re a small business or a larger organization, having a clear payroll checklist can help avoid mistakes, missed deadlines, and unnecessary stress.
Here’s an end-of-year payroll checklist to guide your business through this important process.
1. Verify Employee Information
The first step in your end of year payroll checklist is to ensure all employee information is accurate. This includes:
- Full names and Social Security numbers
- Addresses for W-2 forms or electronic delivery preferences
- Tax withholding elections (e.g., any changes in marital status or dependents)
Confirming this information early prevents issues later on when you’re preparing year-end tax documents. Encourage your employees to verify their own information to catch any errors before tax season.
2. Review Payroll Records
Accurate records are the foundation of a successful year-end payroll process. Now is the time to review all payroll records for any discrepancies or missing data. This includes:
- Total wages paid to employees
- Overtime payments
- Bonuses, commissions, or other special payments
- Taxable fringe benefits like company cars or health insurance
Make sure all hours worked are accounted for and that payroll reflects any necessary adjustments, such as manual checks or corrections from earlier in the year.
3. Reconcile Payroll Taxes
Reconciling payroll taxes with your general ledger ensures that you’ve paid the right amount throughout the year. Compare:
- Federal and state income taxes withheld
- Social Security and Medicare taxes
- Unemployment taxes (FUTA and SUTA)
- Any other relevant local taxes
Any discrepancies between payroll tax deposits and your records should be addressed immediately. Ensuring tax deposits match reported payroll will prevent penalties and delays in filing.
4. Prepare for W-2s and 1099s
The most critical aspect of the end of year payroll checklist is preparing and distributing W-2s for employees and 1099s for independent contractors. By law, these forms must be sent out by January 31. To make the process smoother:
- Verify employee and contractor classifications (W-2 for employees, 1099 for contractors).
- Ensure all wage and tax information is accurate on both forms.
- Check that deductions like health insurance premiums or retirement plan contributions are correctly reflected.
It’s a good idea to get started on these forms early, giving yourself plenty of time to spot and correct any errors before the deadline.
5. Process Year-End Bonuses
Many businesses reward employees with year-end bonuses, and these payments need to be included in payroll. Be mindful of how bonuses are taxed; they are typically subject to federal income tax withholding and FICA taxes (Social Security and Medicare). Depending on the size of the bonus, they may also push an employee into a higher tax bracket temporarily.
Make sure bonuses are processed in the same pay period and reflect appropriately on year-end tax forms.
6. Ensure Compliance with Retirement Contributions
If your company offers a retirement plan like a 401(k), confirm that all employee contributions have been accurately deducted and matched (if applicable) throughout the year. Additionally, make sure the total contributions do not exceed IRS limits, which change year to year. For 2023, the limit for 401(k) contributions is $22,500, with an additional $7,500 catch-up contribution for employees over 50.
Failure to correctly report retirement contributions can result in costly penalties.
7. Prepare for Tax Filing Deadlines
It’s essential to stay on top of all relevant tax filing deadlines, both at the federal and state levels. Key forms and deadlines include:
- Form 941 (Employer’s Quarterly Federal Tax Return) due for the 4th quarter by January 31
- Form W-3 (Transmittal of Wage and Tax Statements) to the Social Security Administration by January 31
- State unemployment tax filings, due dates vary by state
Missing a filing deadline can lead to penalties, so mark your calendar in advance to stay organized.
8. Audit Your Payroll System
Lastly, take this opportunity to audit your payroll system. Ensure that all software is up to date, data is backed up, and that any adjustments or improvements needed for the new year are addressed. Now is the time to evaluate your payroll process and look for ways to make it more efficient in the coming year.
End of Year Payroll Checklist Final Thoughts
Completing your year-end payroll tasks may seem daunting, but with a comprehensive checklist, you can avoid unnecessary errors and stress. By verifying employee information, reviewing records, reconciling taxes, and preparing for tax filings, your business will be ready to hit the ground running in the new year. Staying organized and proactive is key to ensuring compliance and maintaining a smooth payroll process into the future.
Following the end of year payroll checklist will not only help you stay compliant with tax laws, but it will also give your employees peace of mind knowing their paychecks and tax documents are accurate.
Review these links for some additional resources:
The Ultimate Year-End Payroll Checklist for Small Businesses
How to Help Your Employees Complete Form W-4 Properly: A Guide for Employers