Year-End Payroll Processes: How to Close Out the Year Smoothly

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As December approaches, payroll duties often collide with holiday rushes. A clear checklist keeps your business compliant and stress-free.

1. Verify All Employee Information
Confirm names, addresses, and Social Security numbers before issuing W-2s. Correcting errors later requires filing amendments and can delay employee tax filings.

2. Reconcile Payroll Data
Run a full-year payroll summary and compare totals against your accounting ledger. Check that gross pay, deductions, and employer tax liabilities align.

3. Audit Benefit Contributions
Verify 401(k) and health-premium deductions match plan reports. Late or incorrect deposits can create ERISA compliance issues.

4. Process Final Payroll and Bonuses
Decide whether to include bonuses in December payroll or as separate checks. Calculate supplemental-rate withholding correctly to avoid over- or under-withholding.

5. Prepare Year-End Forms
You’ll need:

Form W-2 for employees
Form 1099-NEC for contractors
Form 940 for federal unemployment
File with the IRS and distribute to recipients by January 31.

6. Review Tax Rate Changes
Check next year’s Social Security wage base and state unemployment rates. Update them in payroll software before the first pay run of January.

7. Archive and Back Up Records
Store payroll reports and filings securely for at least four years. Cloud backups protect against data loss and make audits simpler.

Why It Matters
A precise year-end process prevents W-2 corrections, IRS notices, and cash-flow surprises. With clean data, your first payroll of the new year runs flawlessly—and your books start balanced.