Prepare your small business to complete year-end payroll processing and start the new year strong.
What is payroll year end?
Payroll year end covers tasks a business owner completes to prepare for the final payroll of the year. The payroll year-end process also includes fulfilling requirements to run the first payroll of the new year.
Year-end payroll tasks include:
- calculating payroll tax liabilities and deductions
- reviewing and filing payroll tax returns
- preparing for changes to federal, state and local payroll tax laws
- and more …
When is year end for payroll and payroll tax?
While the specific timing depends on your fiscal year, for many companies year-end payroll preparation usually begins in the fourth quarter and runs through the first quarter of the new year. Give yourself plenty of time to work on year-end payroll processing so you don’t miss any critical tasks or deadlines.
What is the difference between year-end payroll reports and year-end financial reports?
There is a significant difference. Year-end financial reports summarize a company’s financial performance and activities for the previous year. These year-end reports include all business income and expenses, including wages and payroll taxes.
Year-end payroll reports focus solely on payroll and federal, state and local payroll taxes.
How can I prepare my small business end-of-year payroll?
The year-end payroll process may vary for each business based on size, industry and location. There are, however, many common steps to preparing a business for year-end payroll processing.
This payroll year-end checklist can help.
Before the last pay period of the year:
- Verify your business information. Ensure the information you have on file is accurate, including your state and federal employer identification number (EIN), state unemployment account number(s), and your business name and address.
- Ask employees to review and confirm their personal information, including full name, address and Social Security number.
- Remind employees to check their W-4 to make sure it is up to date and reflects their preferred federal withholding. You can also share the IRS W-4 tax withholding estimator tool so they can estimate the withholding amount that works best for them in the new year.
- Plan for additional payroll runs, including bonus and holiday checks.
- Estimate your FUTA credit reduction, if applicable.
- Be aware of how Christmas and New Year's Day bank holidays may affect your payroll schedule.
- Run your last payroll of the year before December 31.
- Review your payroll schedule for the new year.
- Review and update your employee handbook policies.
After the final pay period of the year:
- Run a payroll summary report. Review your payroll records and verify payroll tax withholdings, gross wages, net wages, deductions and other information.
- If you run payroll manually, you will need to order paper year end payroll forms. If you work with a full-service payroll provider, like SurePayroll(r) By Paychex, you’ll have to access the forms you need through your payroll account.
- Plan to complete and distribute W-2s to employees and 1099-NECs to contractors by January 31.
- Submit Form W-3 to the IRS, your state’s revenue department and the Social Security Administration by January 31.
- Deposit and report FUTA (Federal Unemployment Tax Act) taxes.
- Deposit FICA taxes for the previous year.
- Before January 1, review and update tax rates and set any new wage base limits. This could include federal and state unemployment tax, Medicare, Social Security (also known as Old Age, Survivors and Disability Insurance or OASDI), and state employment taxes.
- Update any employee earnings or deductions before processing the first payroll of the year.
- Review worker’s compensation coverage and payouts to assess your premiums.
- Review or start a small business 401(k) retirement plan for your employees.
- Any end-of-year payroll taxes you owe are usually due by March 15. You can pay them online via the IRS’ electronic federal tax payment system (EFTPS).
What year-end payroll forms do I need?
In addition to Forms W-2 for employees and 1099-NEC for contractors, small business owners may also need to complete and submit the following year-end payroll tax forms:
- Form W-3: This form summarizes all the W-2 information your business filed.
- Form 940: Use this form to report your annual Federal Unemployment Tax (FUTA) liability.
- Form 941: The employer’s quarterly federal tax return reports income taxes, and Social Security and Medicare withheld from employees’ paychecks. You also use this form to pay the employer’s portion of Social Security or Medicare.
- Form 944: If your annual payroll taxes for Social Security, Medicare and federal income tax is $1,000 or less, you might be able to pay them annually with Form 944.
- Form 1095-B: This form is used by self-insured small employers to provide information on any health insurance you provide employees. You will give a copy to the IRS and your employees.
Frequently Asked Questions: Payroll Year-End
When do I need to distribute W-2s to employees and 1099-NECs to contractors?
You must provide your employees with a W-2 and contractors a 1099-NEC by January 31. Even if your employees and contractors can print the forms out through a portal, you are responsible for letting employees and contractors know that the forms are available. Delivering the W-2s to employees electronically requires employee prior consent.
What should I do if I receive a Notice of Unemployment Rate change?
At the end of the year, businesses may receive notice of a change in their state unemployment insurance tax rates (SUTA). This notice indicates how much you contribute to state unemployment insurance funds. If you receive a notice, review it carefully for accuracy and to understand how the new rate may impact your payroll expenses.
Why does an employee’s first paycheck of the calendar year have different wages, taxes, or net pay when the employee did not make any changes to their withholding?
There are several reasons an employee's first check of the calendar year may be different even if they did not change their withholding.
Some reasons to consider:
- Income tax brackets reset at the start of the calendar year. So even if the employee earns the same amount and has the same withholding levels, they might be in a different tax bracket at the start of the year.
- Some taxes, like Social Security, have a yearly wage base limit. That means once an employee reaches that limit, taxes are no longer taken out for the rest of the year. Those taxes will be deducted at the start of a new calendar year.
- Even if tax withholding amounts have not changed, the employee may have new deductions, like a different health insurance premium amount or they may have increased contributions to their retirement savings plan.
Do I need to update or reset my employees’ time off benefits at the beginning of the year?
Review your company’s policy on the treatment of earned but unused time off benefits. If your benefits are calculated on the calendar year and you follow a use-them-or-lose-them approach to time off, those benefits generally reset at the start of the new calendar year. This means employees will forfeit any earned but unused time off. If your policy allows employees to roll over any unused time to the next year, you will want to validate this happened. If your time-off policy sets specific limits on how much unused time off can be carried over or a time limit to use that time off, you may need to make updates for all or certain employees per your time-off policy.
Do I have to reset my payroll schedule for the new year?
You may want to review your payroll schedule at the start of a new calendar year. The start of the calendar year is a good time to make sure your payroll schedule aligns with federal and state requirements. It’s also a good idea to check if any paydays fall on a bank holiday so you can consider proactively adjusting the pay date.
Simplify Year-End Payroll
You’re an expert in your field. You don’t need to be one in payroll and payroll tax management. The right payroll service provider can help you stay focused on your business, customers and employees.
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