A Business Owner’s Guide: Year-End Payroll and Tax Checklist

As the year comes to a close, most business owners are focused on wrapping up projects, taking time off, and thanking their teams for a job well done. But before you officially close the books, there’s one last important task on your year end checklist: payroll.

Year-end payroll is more than a routine administrative step. It’s an essential process that ensures your wage records, tax filings, and employee data are accurate before you enter a new calendar year. Errors can trigger IRS penalties, frustrate employees, or create unnecessary work for your accountant. The good news is that with early preparation, this process can be seamless.

This guide walks you through the key steps for completing your payroll compliance checklist, filing taxes correctly, and setting your business up for success in the new year.

For a deeper dive into pre-holiday preparation, you can also read:  Preparing for End-of-Year Payroll.

What Is Year-End Payroll and Why Is It Important?

Year-end payroll is the process of reconciling all wages, deductions, benefits, and tax payments before submitting required annual forms like W-2s and 1099s. It verifies that every paycheck, tax deposit, and employee record is correct before the IRS, Social Security Administration (SSA), and state agencies receive your filings.

Completing this process on time helps avoid late fees and ensures your employees receive accurate end-of-year pay stubs. It also allows you to review your books, meet with your accountant, and plan for the year ahead with clean data.

Our Year-End Payroll Compliance Checklist

These are the critical steps every business should take before December 31.

Coordinate and Designate Bonuses

Decide whether to issue holiday or performance bonuses and confirm how those payments will be taxed. Bonuses are subject to federal withholding and must be recorded as supplemental wages under IRS Publication 15.

If bonuses are paid outside regular payroll, make sure your payroll system calculates the correct tax rate. You’ll also want to budget for the additional cash flow needs in advance.

For a reminder of other often-overlooked end-of-year details, review:   Don’t Forget These Year-End Payroll Preparation Tasks.

Third-Party Sick Pay

If your employees received disability or sick pay through a third-party insurer, you’re still responsible for reporting it on their Form W-2. Employers must coordinate with the insurer to obtain totals for the year, as outlined in IRS Publication 15-A.

If those payments are not included before forms are finalized, your W-2s may not match IRS records, creating time-consuming corrections later.

Organize W-2 and 1099 Forms

Double-check that every employee’s address, Social Security number, and withholding information is correct.

Key deadlines:

• January 31: File and distribute Forms W-2 and 1099-NEC.
• February 28 (paper) or March 31 (electronic): File Form 1099-MISC with the IRS if applicable.

Be sure contractors are correctly classified; the U.S. Department of Labor outlines the criteria for employee versus independent contractor status. Misclassification can lead to significant penalties and back taxes.

If you employ 50 or more full-time workers, ensure your Affordable Care Act (ACA) reporting and benefit plan records are current. Employers subject to ACA reporting must file Forms 1094-C and 1095-C with the IRS.

Fringe Benefit Reporting

Taxable fringe benefits must be included in your final payroll calculations. Examples include:

• Personal use of a company car
• Gift cards or cash-equivalent awards
• Employer-paid gym memberships or housing allowances

The IRS Fringe Benefit Guide details which items are taxable. Ensure those values are included in employee income before the final payroll run.

This is also a good time to review job classifications and pay categories for your upcoming Workers’ Compensation audit. Confirm that all employee data and wages are properly coded to avoid premium adjustments.

Delayed Filing

Late filings for W-2s, 1099s, or payroll taxes can trigger penalties and interest. If you anticipate needing extra time, submit a request for an extension using Form 8809.

You can minimize the risk of missed deadlines by coordinating early with your accountant or payroll provider.

Financial Planning for the Upcoming Year

Your year-end checklist shouldn’t stop with payroll; this is also the best time to set your business up for a strong start in January.

• • Check for new state unemployment insurance (SUI) rates. These often reset on January 1.
    
    
  • Reconcile all bank accounts, accounts receivable, and payables to ensure your records align with statements.
    
    
  • Update your balance sheet for any new assets or liabilities.
    
    
  • Before closing the books, confirm that all unprocessed pay runs, adjustments, or voided checks have been completed and recorded. This prevents mismatches between payroll data and your year-end totals.
    
    
  • Meet with your accountant to discuss:
    • Tax strategies such as Section 179 or bonus depreciation for equipment purchases
    • Retirement plan contributions and employee benefits
    • Opportunities to adjust cash flow or expenses
      
      
  • Set SMART goals (Specific, Measurable, Achievable, Relevant, Time-bound) for business growth, hiring, or marketing
    
    
  • Consider whether upgrades to your payroll, accounting, or HR systems could save time and reduce manual entry in the year ahead.
    
    
  • Even if a change in ownership isn’t on the horizon, reviewing your long-term succession or continuity plan helps safeguard your business against unexpected transitions.

If your business uses external vendors or insurance partners, schedule renewals early to avoid gaps in coverage or compliance.

Review Tax Estimates

Before year-end, confirm that your quarterly estimated tax payments match your actual liabilities. Underpayment can result in penalties, while overpayment ties up cash unnecessarily.

Ask your accountant about potential credits, such as the Work Opportunity Tax Credit (WOTC) or R&D credit, that could lower your tax burden.

Exact Payroll can help coordinate your year-end totals with your accountant to make this process easier.

FAQs for Year-End Payroll

Why Is Year-End Payroll Important?

It ensures accurate employee earnings, benefits, and tax information before reporting to the IRS. Clean records and accurate end of year pay stubs help avoid penalties, reduce audit risk, and improve employee confidence.

What Happens if You Miss a Year-End Payroll Tax or Deadline?

The IRS may assess late-filing or late-payment penalties. The longer a return is overdue, the higher the potential fines. If you fall behind, contact your payroll provider or accountant immediately for guidance on corrective filings.

What Tax Forms Do You Need for End-of-Year Payroll?

Common forms include:

• W-2 and W-3 (employee wages and total summary)
• 1099-NEC or 1099-MISC (nonemployee compensation)
• 941 and 940 (federal employment taxes)
• State-specific wage and withholding forms

Exact Payroll’s software automatically prepares these forms for clients and ensures timely electronic filing.

Key Year-End Payroll Dates To Remember

• December 31: Final payroll of the year must be processed.
• January 31: Deadline to distribute W-2s and 1099-NECs to employees and contractors.
• End of February or March: IRS filing deadlines for certain 1099 and ACA forms.

The IRS Filing Deadlines page provides the most up-to-date dates for each tax year.

How to Reconcile Payroll at Year End

Compare payroll records to your bank statements, tax deposits, and benefit payments. Review year-to-date totals for accuracy and ensure all liabilities (taxes, deductions, reimbursements) are cleared.

What if My Business Has 50+ Employees?

Larger employers have additional responsibilities under the Affordable Care Act and state reporting laws.

• Verify ACA benefit reporting and contribution records.
• Ensure employee classifications and salary thresholds meet FLSA requirements.
• Review and renew business licenses, permits, and corporate filings to stay compliant.
• Prepare for your Workers’ Comp annual audit by confirming job codes and payroll data are accurate.

The U.S. Department of Labor’s compliance guide offers a helpful overview of employer obligations by size and industry.

Start the New Year Confidently

Completing your year-end checklist now helps you begin the new year organized, compliant, and ready to grow. From issuing final paychecks to reconciling taxes and preparing your end-of-year pay stubs, a proactive approach saves time and stress in January.

Exact Payroll simplifies the process so you can focus on running your business, not tracking deadlines.

Contact our team today to make your year-end filings simple and accurate.