As another year comes to a close, there are many important things that need to be wrapped up before the end of the year. For your business, your to-do list must include year-end payroll duties. So, what is year-end payroll and how do you complete it effectively? We have the answers and a year-end payroll checklist to keep you informed and organized.
What is Year-End Payroll?
Year-end payroll refers to the accounting, tax, and management tasks that businesses must complete to wrap up the current year and move into the next. This may include meeting with employees, updating information, and processing and submitting forms.
Year-End Payroll Procedures
Year-end payroll can seem intimidating, but it doesn’t have to be! Simply work through this list to ensure that you’ve covered everything.
Before The End of the Year
1. Update Payroll Software
The first step in year-end payroll preparation is updating your payroll software. This will ensure you have the latest version with any technological bug fixes and added features. Keeping it updated will also help protect the critical, confidential payroll data you have stored and back it up for reassurance.
2. Verify Employee Information
Ask employees to review their name, social security number, and address. It is important that this information is up-to-date and accurate for W-2 purposes. This will reduce the number of adjustments that will need to be made after W-2 forms have been distributed to employees and filed with the government.
3. Verify PTO Balances & Rollovers
Take the time to review all employee PTO balances and rollovers and let each employee know how much paid time off they’ll be allowed to take in the new year. By doing so, you’ll help to reduce any confusion or complications regarding PTO later on.
4. Schedule the Distribution of Bonuses
If your company provides performance-based or end-of-year bonuses to employees, make sure the amount is confirmed and scheduled for distribution. Let employees know how much they’ll be receiving and when they can expect to receive the check or direct deposit.
5. Review Wage and Contribution Limits
Double check the limits for Social Security, HSA contributions, and retirement plans. This will help to ensure that individuals don’t exceed the limits and have time to make adjustments if necessary.
6. Confirm the Yearly Holiday Schedule
Verify that all of the holidays your company honored this year will be honored next year. If there are any changes, make sure employees are aware of them. If there are no changes, it may still be a good idea to send out a reminder to employees so they can add the dates to their calendars.
7. Report Fringe Benefit Information
Fringe benefits are extra benefits that employees can receive from their employers. It’s important to collect the following information from each employee to calculate any necessary taxability:
- Amount of personal use of a company car
- Long-term disability benefits
- Group term life insurance benefits
- Moving expenses
- In-office athletic facility use
Being mindful of these items, collecting and verifying information from employees, and reviewing it as early as possible will save time and prevent headaches during the first month of the new year.
8. Order W-2 and W-3 forms
You’ll need to obtain these forms so you can provide them to your employees and submit them to federal and state government facilities. The W-2 form contains information on employee wages and taxes, while the W-3 form combines all earnings, health and Social Security wages, and any money that was withheld. Ordering these forms ahead of time will ensure you have them and can submit them before their due date.
9. Update Labor Law Documents
Make sure your employees are aware of any updates to the labor law within your state. If your company physically hangs posters or digitally scans them to send to all employees, you can purchase a new poster for the new year.
10. Check Federal, State, and Local Tax Rates
It’s also important to take any projected tax rate changes into account. When the rates are changed, employees need to be made aware of any adjustments that’ll be made to their paychecks.
After The New Year Begins
1. Check and Update Payroll
Your employees’ paychecks should reflect any new wage rates, withholding allowances, and other deductions they’ve elected. All checks should be reviewed thoroughly before they are distributed or sent through direct deposit.
2. Distribute W-2 Forms
The W-2 forms that you ordered at the end of the previous year should be filled out and mailed to all employees. You’ll also need to file copies with the state and local government by January 31.
3. Pay FUTA Taxes and File a 940 Form
By January 31, you’ll need to pay any outstanding Federal Unemployment Tax Act (FUTA) taxes and submit a 940 form to the IRS. The tax paid goes toward paying any unemployment compensation to state residents who have lost their jobs.
4. File a 941 or 944 Form
The 941 form is used by most employers. It reports on your company’s quarterly federal tax returns and takes employee compensation into account. However, if your company is very small, you may file a 944 form instead and pay annual taxes rather than quarterly taxes. No matter which form you use, it will be due to the IRS by January 31.
5. Verify 1099 Information
These forms are proof that your company paid employees ($600 or more) over the course of the year. The forms will be distributed to your employees and copies should be sent to the IRS by January 31.
Year-End Payroll Checklist
Use our free, printable year-end payroll preparation checklist to keep you organized! There are spaces to create your own due dates so you can leave plenty of time before the final deadlines.
Tips for Avoiding Year-End Payroll Issues
Stay Informed on Updates and Best Practices
In order to eliminate potential penalties and keep your company payroll organized, it’s advised to keep track of any government updates that may affect your tasks or calculations. It’s also helpful to brush up on year-end payroll best practices prior to beginning the process every year. This will keep them fresh in your mind as you tackle each task.
Stick to Filing Deadlines
Your company may face hefty penalties for not filing the proper forms in time. Minimize the risk of paying fees by adding all due dates to your calendar. Try to work on the forms ahead of time and submit them as early as possible. If you need an extension of time due to various circumstances, you can use an 8809 form to request it.
Make Time to Meet With Your Accountant
To keep your company’s affairs in order, it’s highly recommended that you meet with your accountant to review the year’s losses and gains, calculate taxes, and discuss any upcoming expenses that will need to be paid for. Aside from business planning, your CPA can also help you address any issues or concerns you have with year-end payroll procedures, duties, and forms.