The Ultimate Year-End Payroll Checklist
This simple checklist for small business owners breaks the payroll end-of-year process down into 10 easy steps.
Year-end payroll is a process that businesses must contribute to all year, including payroll reporting and tax filing in the year’s fourth quarter. If you’re looking for a simple guide to walk you through your annual payroll responsibilities, we’ve got you covered.
We’ve broken down the year-end payroll process into ten easy steps. This way, you can close out your payroll and ensure that you file all of the proper tax forms on time.
To make things even easier for you, we’ve also created a printable Year-End Payroll Checklist so that you can mark your progress.
You can print the payroll end-of-year checklist and use it to follow along, or you can jump right in.
Table of Contents
What Is Year-End Payroll?
Year-end payroll processing includes calculating your business’s payroll taxes, employee paycheck deductions, and employee earnings and reviewing payroll records. Year-end payroll processing is completed during the final financial quarter of the year and extends to the first quarter of the following year.
Businesses are legally required to go through the year-end payroll process related to federal, state, and local tax liabilities, employee wages, and bookkeeping.
As a part of the year-end payroll process, businesses must fill out and file forms and records with the appropriate tax authorities, namely the Internal Revenue Service (IRS) and state and local tax departments. Additionally, businesses must review employee and contractor payments and records prior to reporting them.
What Payroll Forms & Reports Do I Need For Year-End Payroll?
By the end of January, employees should have access to a W-2 or 1099, which is a record of payment received and taxes paid. You will also need to submit wage and tax information to the Social Security Administration (SSA) and IRS.
Here’s a look at the year-end payroll forms your business will need to complete and submit.
- W-2 Form: This form reports wages and withholdings to the IRS.
- W-3 Form: This is a summary of the information in the W-2s. This goes with employee W-2s to the SSA.
- 1099-NEC: This is a statement of income for contractors. Starting in the 2021 filing year, businesses must report wages over $600 paid to nonemployees (or over $10 for royalty payments). Any income earned prior to 2020 by nonemployees must be reported via 1099-MISC.
- Form 1096: If you’ve paid any contractors and given them a 1099-MISC or 1099-NEC, you will need to summarize that payment information and submit it to the IRS with this form.
- Form 940: This is the form needed to pay your Federal Unemployment Tax (FUTA) liability to the government.
- Form 943: This form should be filed if your business paid wages to any farmworkers subject to Social Security, Medicare, or income taxes.
- Form 941: This form is due quarterly and reports employee payroll taxes collected for each quarter. Payroll taxes include federal income taxes, Social Security, and Medicare taxes.
- Form 944: If your payroll taxes are less than $1,000 annually, you may qualify to pay these taxes yearly instead of quarterly. Small businesses that qualify will fill out Form 944 instead.
- Form 1095-B: If you offer health insurance, you need to send this form to the IRS and your employee to document that health coverage.
You can find more information about year-end tax forms your business will need to file on the IRS’s Employment Tax Forms page.
Year-End Payroll Reports
Beyond reporting to the IRS and SSA, year-end payroll gives businesses the perfect opportunity to review their company’s payroll choices. Running year-end payroll reports can provide you and your employees with the information you need to make decisions regarding any payroll changes you want to make going into the new year. Here’s a breakdown of some essential payroll reports to run when handling year-end payroll.
- Payroll Summary Report: Set the date range for the tax year from January 1 to December 31. Running this report will grant you a payroll summary detailing tax withholdings, wages (gross and net), deductions, and additional general payroll information.
- Retirement Contributions: This report will pull up all employer and employee contributions to retirement accounts. Employees may want to alter how much they contribute in the coming year.
- Workers’ Compensation Report: If your business paid out workers’ comp to any employees throughout the tax year, you can use the information in this report to have your insurance provider (if applicable) reassess your company’s premiums.
- Employee Summary Reports: Provides a comprehensive look at the wages, deductions, and tax withholdings for an individual employee or contractor.
- Paid-Time-Off (PTO) Report: To help avoid scheduling conflicts and ensure that your business is always staffed appropriately, run a PTO report to review all the PTO paid and any hours remaining.
As always, the exact process and forms required to close your payroll are dependent on your state and industry. Use these lists as a guide, but verify your data with an accounting or bookkeeping professional.
Don’t have an accountant on call? Learn how to find a top-notch accountant for your business by checking out our guide on finding an accountant for your small business.
When Do You Have To Complete Year-End Payroll?
Year-end payroll should be completed during the final quarter of the tax year and may extend into the first quarter of the next year. However, payroll is a year-long process: Keeping your payroll records updated throughout the year will help with any end-of-the-year accounting and paperwork management.
Even if you outsource payroll, there is information you should verify and deadlines you shouldn’t miss. Fortunately, businesses are not required to submit all year-end payroll forms and reports at once. Here’s a look at the filing and reporting deadlines for year-end payroll.
|Payroll Report/Form||IRS Electronic Filing Deadline||Notes|
|Form 1096||February 28||
|Form 940||January 31||With FUTA tax: February 10|
|Form 941||January 31|
|Form 944||January 31||If deposits are made on time and in full, the deadline extends to February 10|
|Form 1095-B||March 31|
How To Complete Year-End Payroll In 10 Steps
To complete payroll year-end, businesses must submit forms to the IRS and SSA to assess tax liabilities. They must also evaluate wages, withholdings, and deductions that occurred throughout the tax year. Here’s a step-by-step walkthrough of year-end payroll for businesses.
Step 1: Verify All Employee & Company Information
You will need to ensure that all the information for your company and employees is correct. That’s just payroll best practices 101 — know who you are paying. First, verify that your company name, tax IDs, and company tax information are updated and accurate. Next, make sure that your employee information is up to date. For employees, check the following:
- The employee’s name is spelled correctly
- Correct Social Security Number
- Updated/accurate employee addresses
- Lived-in/worked-in jurisdictions
If you find discrepancies between recorded information and accurate information, update your files and/or let your payroll service provider know of any changes. You may incur penalties for any errors, so be sure to double-check.
For contractors who will receive a 1099 form from your business, be sure that the information on their W-9 is correct and up to date.
Step 2: Verify Wages, Taxes, & Benefits
After you’ve checked and made sure all your employee and company information is accurate, the next step is to run through and verify that your wage, tax, and benefits numbers match your payroll numbers. Here’s what you’ll need to verify:
- Yearly PTO accrual
- Worker status (active, terminated, on leave, deceased)
- Filing status (exempt or non-exempt)
- Number of exemptions
- Year-to-date wages and taxes
- Pre-tax amounts
Most of the information above is on an employee’s W-4 form. Employees can change their tax information with the government at any time, so this is where you may find and remedy discrepancies. You’ll also want to identify and notify employees of any unused benefits. Bonus: Many payroll software programs have reporting features that will do this work for you.
Step 3: Order Your W-2s
If you run payroll yourself or if you do not have a payroll provider that manages your W-2s, you will need to order paper forms from the Internal Revenue Service. A W-2 is a tax and wage statement for your employees. Contractors will receive a 1099 form.
You can also file these forms online on the IRS website. Paper forms take ten business days to mail, so plan ahead and order these in December.
Step 4: Manage Paid-Time-Off
What is your company’s paid-time-off (PTO) policy? Do you offer PTO as a lump sum at the start of the year, or does your PTO accrue as the year progresses? Will your employees’ PTO reset in January? What happens to the unused time?
Some states have mandates on whether or not a company can clear PTO, so check with your accountant or bookkeeper about the laws in your state. If you pay out accrued PTO, you will need to manage that payment with the last paycheck of the year and keep a record of that payment for tax purposes.
Step 5: Decide On Bonuses
If you are awarding bonuses, those payments must go out with the last paycheck of the year. You will need to keep a record of bonuses to calculate bonus taxes.
Remember that bonus reporting differs depending on your business’s accounting method. If your business uses the cash-basis accounting method, deduct bonuses in the tax year you paid them. If your business uses the accrual-basis accounting method, bonuses may be deducted in the same year they are paid or the following year, depending on when the bonuses were declared, accrued, and paid.
Not sure which accounting method your business uses? Check out our cash-basis vs. accrual-basis accounting guide for an in-depth explanation of how the two accounting methods differ.
Step 6: Update Your Compliance Posters
Following the start of the tax year’s fourth quarter, ordering your new labor law posters for the upcoming year is important. These posters are federally mandated and expected to be displayed in a conspicuous place where all employees can read them. Failure to post updated labor law posters could result in fines, fees, or even labor lawsuits.
Step 7: Update Payroll Information
Before you run your first payroll of the new year, you will need to update your payroll information. That includes checking for minimum wage rate changes, new tax rates, making adjustments to employee information, balancing PTO, and tweaking yearly deductions.
You should also update your payroll schedule and have it distributed to your company’s HR department. Be sure to make payroll schedules available to employees, as well.
Step 8: Deliver W-2s/1099s To Employees
Your employees need their W-2/1099 forms documenting their pay and taxes for their own tax filings. You are legally responsible for delivering pay and tax information to employees by January 31.
Employees must consent to receive their W-2s/1099s electronically from employers. Otherwise, employers are responsible for issuing employees a hard copy of their W-2s/1099s.
Step 9: File Your W-2s/1099s
File all W-2s and 1099s with the Social Security Administration by January 31. Depending on location and local tax laws, you may also need to file W-2s with your state or county.
In addition to each W-2, you will send a W-3 form; this form is needed for each employee and is a summary of the information on the W-2. You may file for an extension to file W-2 and 1099 returns, but it must be submitted after January 1 and before the filing deadline.
Step 10: File Tax Forms 941, Form 940, & Form 944
You will need to pay your federal unemployment tax (FUTA) from the fourth quarter with Form 940. You must also file federal income taxes and FICA (Social Security and Medicare taxes) through Form 941. The last form (Form 944) is an annual return of all paid payroll taxes. All are due by January 31.
If you need a refresher on the various types of payroll taxes your business needs to collect, read our guide on payroll taxes for small businesses.
Get Started With Our Year-End Payroll Checklist
Fortunately, year-end payroll is as simple as accounting for the wages and taxes your business has paid and withheld throughout the year. As you look to settle books and wrap up your fourth quarter taxes, you might find that you’re interested in outsourcing the task next year if you don’t already. The best payroll software solutions include tax services as part of their payroll programs.
Whether you’re running payroll or outsourcing, use our Merchant Maverick Year-End Payroll Checklist to get started. Check out our other great payroll and tax resources for more help running your small business.
- The Complete List Of Small Business Tax Deductions
- Everything You Need To Know About Small Business Payroll
- The Ultimate Year-End Accounting Checklist: How To Close The Books At The End Of The Fiscal Year