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2021 Year-end Payroll Checklist for Your Business

business owner going over her year end payroll checklist

As you finalize your payroll activities this year and set compensation and benefits for next year, use this year-end payroll checklist to help you stay on track.

End-of-year Checklist for Payroll

As the end of the year approaches, it's important to make sure that your payroll year-end information is up to date. To prepare for 2022, there are numerous steps for year-end payroll reporting and taxation that can help keep your information organized and accurate.

Even if you're experienced with end-of-year payroll, it can be easy to overlook crucial steps, which can leave you scrambling to tie up loose ends. Using an organized year-end payroll checklist can help make sure you don't overlook any major requirements from a payroll or benefits perspective.

How to Prepare Before the Last Payroll of the Calendar Year

Proper preparation for year-end payroll taxes begins well before the end of the year. Wondering how you can prepare for year-end payroll? Here's a closer look at steps you can take now to prepare for the end of the year, even before your last payroll check is written.

Verify Business Information

The business information you have on file for tax purposes should always be accurate, so now is the time to verify that all of these details are correct. Specifically, verify your state and federal Employer Identification Number (EIN), as well as your company name and address. You'll want to do the same with your state unemployment account number(s).

Set Compensation for Next Year

As you prepare your budget for the coming year, you may want to factor in any expected pay raises for your staff. Of course, the amount you offer depends on what you can afford after factoring in both the cost of compensation and payroll taxes.

Keep in mind that the wage base for the Social Security portion of FICA in 2022 will be $147,000, which as an employer will result in paying more FICA taxes, as the 6.2% share is applied to this higher wage base. For non-exempt workers, check to see if there are any 2022 minimum wage rate increases for the states and localities in which you operate.

Set Year-end Bonuses

Some companies choose to offer annual bonuses to employees. Bonuses may be tax-deductible, but when do you deduct them? Assuming that you report your income and expenses on a calendar-year basis, then:

  • If you are a cash basis business: Deduct the bonuses in the year in which they are paid. If you pay 2021 bonuses in 2021, they're deductible for 2021. If you pay 2021 bonuses in 2022, they're deductible in 2022.
  • If you are an accrual basis business: Bonuses declared (and accrued) before the end of the year are deductible this year if they are paid within 2½ months after the close of the year (provided that the employee is only required to be employed on the bonus declaration date and not on the bonus payment date). However, bonuses paid to S corporation shareholder-employees are not deductible until paid. For owner-employees in a C corporation, the bonus is deductible only when paid in the case of a personal service corporation or for the majority (more than 50%) owners.

Advise Employees about Unused Benefits

Some of the benefits that employees earned or paid for in 2021 may expire at the end of the year. Consider your company policies for these benefits and advise employees accordingly:

  • Vacation, sick days, or personal leave time: Under company policy, can unused days be carried over? And if so, are there limits to the amount that can be carried over? Annotate any remaining paid time off and communicate this information to employees so that they can schedule and coordinate leave time accordingly.
  • Flexible spending accounts (FSAs) for medical costs and dependent care: Usually, FSAs have a use-it-or-lose-it feature. Generally, amounts remaining in the account at the end of the year are forfeited. However, plans may allow employees to submit claims within a set time (run out period) for expenses incurred in the previous year. For example, an employee may submit reimbursement for a medical expense incurred on December 15, 2021, by January 30, 2022. Typically, a medical FSA can also provide for a grace period of up to 2½ months after the close of the year for new expenses, or the FSA can allow for a carryover of up to $550. The FSA cannot offer both a grace period and carryover option. Advise employees about the terms of your plans. In 2021 under the pandemic relief provisions of the CCA employers may have an expanded grace period and carryover periods.

Confirm Employees' Identifying Information

When it comes to payroll, year-end is a great time to check for inaccurate or outdated employee information, since these inaccuracies can lead to costly delays and reprints of W-2s, as well as IRS-imposed penalties. Ask employees to confirm their full name, Social Security number, address, and additional contact information to help streamline your end-of-year processes and ensure that vital tax documents get to the correct location. This is also the time to ensure that deceased employees are properly coded and abide by any state laws regarding final pay for deceased employees.

Record All Processed Paychecks

While you won't be able to finalize your annual payroll and tax numbers until after the final pay period, you can certainly get a jump start on recording and verifying everything that has already been processed. Review previous pay periods to ensure that all amounts are logged accurately by verifying:

  • Employee wage amounts
  • Benefits deductions
  • Child support or other miscellaneous deductions
  • Disability or other benefits payments
  • Special tax exemptions that may have occurred throughout the calendar year

As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, eligible employers may have deferred the employer portion of Social Security taxes through the end of 2021. If your company opted to take advantage of this relief measure, you'll also need to verify the deferred amounts, which can affect the amount of taxes due for the 2022 payroll tax year.

Additionally, if your company allowed employees to defer their portion of Social Security taxes based on the Presidential Memorandum and resulting IRS Notice 2020-65, you will need to verify the deferred amounts and plan for the necessary payroll adjustments to pay them back by April 30, 2022.

Order W-2s, W-3s, and Other Applicable Tax Forms

At a minimum, you will need to provide your employees with end-of-year tax statements via IRS Form W-2. You can get these necessary forms directly from your payroll service provider, printed from your payroll management system, or directly from the IRS. If you plan to obtain blank forms directly from the IRS for manual completion, be sure to order the forms well before the end of the year so you can begin processing them immediately after the final payroll period.

Your business may also be subject to health coverage reporting requirements as part of the Affordable Care Act. If you have more than 50 employees or your business is self-insured, you must file Form 1095 with the IRS to verify that you offered health coverage. Self-insured small businesses must file Form 1095-B, and employers with more than 50 employees must file Form 1095-C. Failure to file or furnish these forms in a timely manner could lead to penalties.

Determine Your Payroll Policies for the New Year

While many businesses follow the same payroll schedule and policies year after year, you may be considering a change to your payroll structure. In the age of more employees expecting quick access to their paychecks, you may want to evaluate whether options such as pay-on-demand make sense for your business. The end of the year is the best time to implement a change, so evaluate those decisions now. Determine the paycheck deposit schedule you plan to use in the new year, as well as what options you'll have for employees to receive their paychecks.

Check for Special Circumstances

While these things may not apply to all businesses in every calendar year, you may have some special tasks to complete if your business experienced any of the following:

  • Newly hired employees or employees who didn't complete a W-4 at the time of hire
  • Employees with voided or reversed paychecks
  • Employees or former employees with active payroll disputes

If any of these situations apply, try to resolve these issues before the end of the year. If that isn't possible, verify how these issues will affect your end-of-year payroll.

What to Do After the Last Payroll of the Year

While much of the planning and organization on your payroll year-end checklist can be done in advance, there are several important steps to complete after the final payroll period of the year. Once your final payroll period has been calculated, be sure to do the following.

Finalize Wage, Tax, and Benefits Information

Before finalizing your payroll for the current year, give one last review to ensure everything looks accurate for each employee and your company as a whole. Total each employee's wages, taxes paid, and benefits earned throughout the year, then calculate summary figures for your business to use on the applicable year-end tax forms. This also includes any fringe benefits you offer, which are generally included in an employee's income and can include personal and sick days, partial tuition reimbursement, company car, or stock options. Make sure that you report fringe benefits under employee earnings.

Distribute Forms W-2 to All Employees

Once the final pay period has ended and you have reviewed each employee's payroll calculations, you can print and distribute Forms W-2. Some payroll providers will send Forms W-2 directly to your employees. Regardless of delivery method, employees must receive a copy (or have access to download a copy) of their Form W-2 by January 31 of the following calendar year, so these forms must be calculated and distributed quickly.

File Tax Forms with the IRS and Deposit Taxes Owed

Business tax obligations will vary by state, business size, industry, and several other factors. Most businesses, however, will be required to file:

  • An annual business tax return;
  • Forms W-2 and W-3 for each employee;
  • Form 940 (your FUTA tax return) and deposit fourth quarter FUTA taxes by January 31; and
  • Quarterly Form 941 tax return or the annual Form 944 by January 31, depending on when you file.

If your end-of-year payroll tax return shows that you owe taxes, these must generally be paid online via the IRS business tax website. While individuals generally have until April 15 to file personal income taxes each year, business tax returns and any taxes owed are generally due by March 15. Keep these important filing dates in mind as part of your year-end payroll tax checklist.

Review the Coming Payroll Year and Initiate Next Year's Payroll Schedule

After you have wrapped up this year's payroll, review your payroll schedule for the next fiscal year. Check all period-ending dates and quarterly closing dates to make sure they do not fall on any major holidays, weekends, or other dates that would make it extremely difficult to process in a timely manner. Make any necessary adjustments to your schedule, then set up your new payroll plan for the coming year.

Review New or Updated Regulations

Account for State/Local Minimum Wage Changes

As of the time of this writing, many states have announced minimum wage rate increases, including California, Florida, Illinois, and Nevada, among others. Other states and cities have yet to announce their minimum wage rates for the upcoming year. Since many wage increases become effective January 1, 2022, it's important to take this into account when determining compensation for the upcoming year.

Conclusion

With a bit of advanced planning and this helpful end-of-year payroll checklist, you can successfully wrap up this year's payroll requirements and set a smooth foundation for the year ahead. By considering these factors as you finalize your payroll activities for this year and consulting with your payroll provider, you can help avoid fines and penalties for non-compliance, meet all required deadlines, and establish payroll practices that will help you retain workers through the new year.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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