2025 Year-End Payroll & Tax Checklist for Employers

As 2025 comes to an end, now is the time to prepare for important year-end payroll tasks, understand key updates for 2026, and take note of important dates. This year-end payroll checklist and tax guide will walk you through what you need to know.

Key items to note include the Social Security wage base increase for 2026, state minimum wage increases on January 1, 2026, and IRS filing updates. We'll also cover how to verify employee information, process your final paychecks, send out W-2s, and get ready for 2026 so you can avoid mistakes, penalties, and delays.

Payroll Checklist: Before the Last Payroll of the Calendar Year

As you prepare for filing payroll taxes and navigating year-end payroll, pay close attention to the changes above, especially the FICA wage base and state minimum wage changes. Here's a closer look at some steps you can take now to prepare for the end of the year.

Verify Business Information

Verify that the business information you have on file for tax purposes is accurate. Specifically, confirm your state and federal employer identification number (EIN) and your company name and address. Check your state unemployment account number(s) as well.

Review Compensation for 2026

As you prepare your budget for the coming year, factor in any expected pay raises for your staff. Specific amounts will likely depend on what the law requires (e.g., minimum wage/salary thresholds), as well as what you can afford after factoring in costs such as current employee compensation and payroll taxes.

Here are some things to keep in mind:

• The wage base for the Social Security portion of FICA in 2026 is $184,500, meaning employers will pay more FICA taxes. The 6.2% share will be applied to this higher wage base.
• For non-exempt employees, verify you follow any minimum wage rate increases for the states and localities where your business operates.
• Ensure that exempt employees are being paid appropriately (e.g., receive at least the minimum threshold each workweek on a salary or fee basis) under the Fair Labor Standards Act (FLSA). Review your state's specific requirements now to ensure compliance.
• Businesses in certain states also need to check if any salary threshold changes are taking effect that would require adjustments for their exempt employees above and beyond FLSA requirements. States like California, New York, and Washington have their own salary thresholds for exempt employees that may be higher than the federal requirement, so employers in these states should review both federal and state-specific rules.

Review Year-End Bonus Structure

If you offer bonuses to your employees, they may be tax-deductible. Assuming that you report your income and expenses on a calendar-year basis, use these guidelines to determine when you should deduct them:

• If you are a cash-basis business: Deduct the bonuses in the year they are paid. If you pay bonuses in 2025, they're deductible for 2025. If you pay 2025 bonuses in 2026, they're deductible in 2026.
• 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 by March 15th (provided that the employee is required to be employed only on the bonus declaration date and not on the bonus payment date).
• Bonuses to S-corporation shareholder-employees are deductible only when 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 percent) owners.

Depending on the type, bonuses may also have an impact on overtime paid to nonexempt employees. Under the FLSA, bonuses can be either discretionary or nondiscretionary:

• Discretionary: These bonuses are typically paid solely at the discretion of the employer and are not announced to or known by employees in advance (e.g., bonuses for overcoming a challenging or stressful situation)
• Nondiscretionary: These bonuses include those known to employees, creating an expectation to receive the bonus (e.g., attendance bonuses, production bonuses, etc.)

Generally, nondiscretionary bonuses must be included when calculating any overtime pay owed to a nonexempt employee for the period covered by the bonus.

All bonuses must be reported as taxable income on Form W-2 in Box 1 (wages, tips, other compensation). Bonuses are subject to federal income tax withholding, Social Security tax, and Medicare tax.

The IRS treats bonuses as supplemental wages, which means employers can use either the percentage method (a flat 22% federal tax rate for bonuses under $1 million) or the aggregate method (combining the bonus with regular wages) for calculating federal income tax withholding.

Regardless of which method you use, all bonuses must be properly reported and withheld for payroll taxes. Make sure your payroll system accurately tracks and reports all bonus payments to ensure compliance and avoid penalties.

Consult with your attorney, trusted advisor, or HR Professional for assistance determining what impact, if any, bonuses may have on overtime pay owed to nonexempt employees under the FLSA, as well as state or local law.

Communicate Unused Benefits Deadlines to Employees

Some of the benefits employees earned or paid into in 2025 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: Can unused days be carried over based on company policy and applicable law? If so, are there limits to the amount that can be carried over? Are there any amounts that need to be paid out? If so, are there timing parameters for when the payouts must occur? Note any paid time off that will expire at year-end 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: The contribution limit for health care flexible spending accounts (FSAs) will increase to $3,400 for 2026 to adjust for inflation, up from $3,300 in 2025. Employees may elect to contribute up to $3,400 in pre-tax dollars to their health care FSA for the 2026 plan year.

Historically, FSAs have a use-it-or-lose-it feature, which means 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, 2025, by January 30, 2026. Typically, a medical FSA can also provide a grace period of up to 2½ months after the year's close for new expenses, or the FSA can allow for a carryover of up to $660 from 2025 into 2026. The FSA cannot offer both a grace period and a carryover option. Advise employees about the terms of your plans.

Confirm Employee Identifying Information

Check for inaccurate or outdated employee information before preparing 2025 W-2s. These inaccuracies can lead to costly delays, reprints of W-2s, and 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.

If an employee has had a name change due to marriage, divorce, or other reasons, make sure the name on their W-2 matches the name on file with the Social Security Administration. This is also the time to ensure that deceased employees are correctly coded and that you abide by state laws regarding final pay for deceased employees.

Record and Reconcile All 2025 Paychecks

While you won't be able to finalize your annual payroll and tax numbers until after the final pay period, you can get a jump start on recording and verifying everything that has already been processed. Review all 2025 pay stubs and past pay periods to ensure that all amounts are logged accurately by verifying the following:

• Employee wage amounts
• Benefits deductions
• Child support or other miscellaneous deductions
• Disability or other benefits payments
• Employees exceeding the $176,100 FICA wage base for 2025
• Special tax exemptions that may have occurred throughout the calendar year

Evaluate Tax Credit Opportunities

Before the end of the year, take time to assess whether your business qualifies for valuable tax credits that could reduce your tax liability. Many employers miss out on significant savings simply because they aren't aware of available credits or don't take action before year-end deadlines.

• Work Opportunity Tax Credit (WOTC): The Work Opportunity Tax Credit provides tax incentives to employers who hire individuals from certain targeted groups who face barriers to employment. If you hired employees in 2025 from qualifying groups — such as veterans, recipients of certain government assistance programs, or individuals living in designated community zones — you may be eligible for a credit for each qualified employee.
• Research and Development (R&D) Tax Credit: The R&D tax credit rewards businesses that invest in innovation, product development, or process improvements. Many small and mid-sized businesses don't realize they qualify for this credit. Eligible activities include developing new products, improving existing products or processes, creating prototypes, or conducting technical research. Document your qualifying expenses and activities before year-end to support your claim.
• Small Business Health Care Tax Credit: If you have fewer than 25 full-time equivalent employees and you pay at least 50 percent of employee health insurance premiums, you may qualify for the Small Business Health Care Tax Credit. To determine eligibility for this credit, review your employee count, average wages, and premium contributions before the end of the year.

Consult with your tax advisor or accountant before December 31, 2025, to evaluate your eligibility for these and other available tax credits. Proper documentation and timely filing are essential to claim these benefits, so don't wait until tax season to explore your options.

Order Required Year-End Tax Forms

Plan ahead to provide employees with 2025 wage statements by January 31, 2026 via IRS Form W-2. You can get these necessary forms from your payroll service provider, printed from your payroll management system, or the IRS. If you plan to obtain blank forms directly from the IRS for manual completion, order them well before the end of the year so you can begin processing them immediately after the final payroll period.

Remember, if you file 10 or more information returns (including W-2s, 1099s, and other forms combined), you are required to file electronically with the IRS.

Review Payroll Policies for 2026

The end of the year is a good time to make sure your payroll schedule and policies still meet your needs. Many businesses use the same payroll setup year after year, but changing employee expectations and evolving technology make this a good time to consider new options. Before January 1, review your paycheck deposit schedule, payment methods, and any policies you want to change or add for the coming year. Specifically, consider:

• Updated Payroll Options: Many employees today want faster and more flexible access to their paychecks. Pay-on-demand (also called earned wage access) lets employees get some of their earned wages before the regular payday. Daily pay options are also becoming more common, especially for businesses with hourly workers or high turnover.
• 2026 Holiday Schedules: Plan around federal holidays that might affect your normal payroll schedule. Important dates include New Year's Day (January 1), Memorial Day (May 25), Juneteenth (June 19), Independence Day (July 4, observed July 3), Labor Day (September 7), Thanksgiving (November 26), and Christmas (December 25). If your regular payday falls on a federal holiday or weekend, process payroll early so employees get paid on time.

Address Special Circumstances

While these things may not apply to all businesses in every calendar year, take note of the following circumstances and associated tasks that may impact your business:

• 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.

Payroll Checklist: After Year's Last Payroll and Before First 2026 Payroll

While much of the planning and organization on your 2025 year-end payroll checklist can be done in advance, there are several essential steps to complete after the final payroll period of the year.

Finalize Annual Wage, Tax, and Benefits Totals

Before finalizing your payroll for 2025, review your information to ensure everything looks accurate for each employee and for the company. Total each employee's wages, taxes paid, and benefits earned throughout the year, and 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.

Prepare and Distribute 2025 Forms W-2

Once the final payroll for the year has been processed, 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 February 2, 2026, so these forms must be calculated and distributed quickly. Copies must also be sent to the Social Security Administration by this date.

Prepare and File 1099 Forms

If you paid any independent contractors, freelancers, or other non-employees $600 or more during 2025 for services, you must report those payments to the IRS using Form 1099-NEC (Non-employee Compensation). Be sure you have a W-9 form on file with each contractor's correct information. Form 1099-NEC must be provided to contractors and filed with the IRS by February 2, 2026, whether you file on paper or electronically.

File Federal Payroll Tax Forms and Pay Taxes Owed

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 typically have until April 15 to file personal income taxes each year, employers must file payroll tax returns much earlier. Forms 940, 941 (Q4), and 944 are all due by February 2, 2026.

Note: Business income tax returns have separate deadlines: partnerships (Form 1065) and S-corporations (Form 1120-S) must file by March 15, while C-corporations (Form 1120) file by April 15.

Address State and Local Minimum Wage Changes and Tax Requirements

Many states and localities have announced minimum wage rate increases in response to inflation rates that continue to impact individuals and businesses nationwide. Scheduled increases are planned in numerous states and localities, and additional increases may be announced before the end of the year. Since many wage increases become effective on January 1, it's essential to consider this when determining compensation for 2026.

If your business operates in multiple locations, verify your wage and tax obligations in each locality where you employ workers.

Prepare for 2026 Payroll Launch

After you have completed this year's payroll, review your payroll schedule for 2026. Check all period-ending and quarterly closing dates to ensure they do not fall on any major holidays, weekends, or other dates that would make processing in a timely manner difficult. Make any necessary adjustments to your schedule based on updated 2026 tax tables, and then set up your first 2026 payroll.

What Is Year-End Payroll?

Year-end payroll is the careful review and verification of your financial information from the fourth quarter of the calendar year through the first quarter of the following year. Businesses are responsible for year-end payroll tasks related to employee payments and records, including:

• Accurately calculating tax liabilities, employee compensation, and deductions to be withheld from employee paychecks.
• Reviewing relevant tax documents to make sure you track all payments correctly in the new year.
• Completing and filing forms with the Internal Revenue Service (IRS), Social Security Administration (SSA), and state and local tax departments.
• Identifying and preparing for changes to local, state, and federal employment regulations that affect your business in the new year.

For 2025 year-end, take note of the Social Security wage base increase to $184,500 for 2026, minimum wage changes in 18+ states effective January 1, 2026, and any tax credits available to your business.

A payroll calendar can be a game-changer when planning for the upcoming year. It helps to ensure that all payroll-related administration is completed on time and that payroll delays are avoided.

Why Is Year-End Payroll Important?

End-of-year payroll is critical for tax compliance. It helps ensure all federal, state, and local taxes are calculated and filed correctly. Businesses can avoid penalties or legal issues from missed deadlines or errors by closing payroll accurately, issuing all forms (such as W-2s and 1099s) on time, and reconciling accounts.

In addition to compliance, the end-of-year payroll provides financial clarity. By closing the year with accurate records, you can confidently plan for the next fiscal year and align your budget with financial goals. Payroll accuracy supports your business and employees' tax planning while setting you up for a clean start in the new year.

When Does the 2025 Payroll Year End?

When submitting payroll forms and tax information, make every effort to meet important 2025 payroll year-end dates. Business tax obligations for year-end payroll and 2026 filing year deadlines will vary by state, business size, industry, and several other factors, but most businesses will be required to file:

• An annual business tax return, whose filing deadline depends on your business structure
• Forms W-2 and W-3 for each employee by February 2, 2026.
• Form 1099-NEC for contractors by February 2, 2026.
• Form 940 and fourth quarter FUTA taxes deposited by February 2, 2026.
• Quarterly Form 941 tax return or the annual Form 944 by February 2, 2026 (depending on when you file).

Be aware that proper preparation for year-end payroll taxes begins well before the end of the year. It's essential to keep accurate, up-to-date payroll records throughout the year to help you meet required deadlines and make payroll tasks as straightforward as possible. This is a great addition to your end-of-year payroll and tax checklist. To help estimate your payroll tax responsibilities as you prepare for year-end filings, you can use our Employer Payroll Tax Calculator.

What Happens if You Miss a Year-End Payroll Tax or Deadline?

Missing a year-end payroll tax deadline can have financial and legal consequences for your business, including penalties, interest, and IRS scrutiny. Late filings can also result in fines and unnecessary stress. In addition to penalties, you may face audits or deeper dives into your payroll practices, which can bring more administrative burdens.

If a payroll deadline is missed, act fast. Here's what to do:

• Identify the Problem: What was missed? A filing or payment?
• File Now: File the paperwork as soon as possible, even if it's late.
• Fix Errors: If needed, file an amended return to correct mistakes.
• Call the IRS: If penalties apply, consider setting up a payment plan to pay the fine.
• Engage a Professional: You may want to contact your accountant or tax lawyer to remedy the missed deadline.
• Review Processes: Implement safeguards, like automated reminders or payroll software, to prevent future missed deadlines.

Taking these steps can help minimize further financial impact and ensure payroll operations remain compliant.

Required Tax Forms for End-of-Year Payroll

As an employer, you must send employees and contractors specific tax forms by the end of January and submit wage and tax information to the SSA and IRS. Specifically, some of the year-end forms include:

• Form W-2: Reports employee wages and withholdings to the SSA.
• Form W-3: Summarizes the information in the W-2. This is submitted with W-2s to the SSA.
• Form 1099-NEC: A statement of income (any wages over $600) for contractors.
• Form 940: Filed with the IRS by businesses with one or more employees and used to determine the employer's federal unemployment tax (FUTA) based on the business's annual payroll.
• Form 941: Due quarterly and used to report wage withholding for income taxes, the employee's share of Social Security and Medicare (FICA) taxes, and the employer's share of FICA.
• Form 944: Applies to employers with annual tax liability who withheld federal income tax, FICA (employee and employer share) totaling $1,000 or less.
• Form 1095: As part of the Affordable Care Act, if you have an average of more than 50 full-time employees, including full-time equivalents, during the preceding calendar year or your business is self-insured, you must file Form 1095 with the IRS. Self-insured small companies must file Form 1095-B to report information on individuals provided minimum essential coverage, and employers with more than 50 full-time equivalent employees must file Form 1095-C on health insurance coverage offered to full-time employees and their dependents. If self-insured, they must also provide information on individuals enrolled in coverage. Failure to file or furnish these forms on time could lead to penalties.

Key Year-End Payroll Dates To Remember

As we near the end of the year, keep track of important year-end payroll and tax deadlines to avoid late filings, fines, and penalties. Be sure that employee tax forms like W-2s and 1099s are prepared and distributed on time and that payroll taxes are paid to the IRS.

To help you stay organized and transition smoothly to the new year, we've compiled a table of the most critical 2025 year-end payroll deadlines, form distribution, filings, and tax payments. Use this table as a quick reference to ensure everything gets done on time.

Organizing these key dates in advance helps you stay on top of payroll requirements and reduce the last-minute rush that can lead to mistakes or missed deadlines.

Common Year-End Payroll Mistakes To Avoid

Most payroll errors happen because businesses wait until the last minute to prepare or lack systemic verification processes. Here are the most common year-end payroll mistakes and how to avoid them.

• Missing the January 31 (February 2 for 2026) deadline for W-2s and 1099s. Failing to distribute Forms W-2 and 1099-NEC by the January 31 deadline can result in penalties starting at $60 per form and increasing based on how late you file.
  • Avoid This Mistake: Start gathering employee and contractor information early. Verify that all names match Social Security Administration records, confirm addresses are current, and request missing Form W-9s from contractors immediately.
• Overlooking state and local tax reporting requirements. Each state has its own year-end reporting requirements, filing deadlines, and forms. Some states require separate unemployment insurance reports, state income tax withholding reconciliations, or copies of federal forms. Missing these deadlines can result in penalties and interest charges.
  • Avoid This Mistake: Review the specific requirements for every state where you have employees. Create a checklist of all federal, state, and local filing obligations before December ends.
• Misclassifying workers and missing 1099s. Misclassifying workers as independent contractors when they should be employees (or vice versa) is a costly mistake. If you've been treating someone as a contractor all year but they should have been an employee, you may face back taxes, penalties, and potential legal issues. Similarly, failing to issue 1099-NEC forms to contractors who were paid $600 or more can result in penalties and IRS audits.
  • Avoid This Mistake: Before year-end, review all contractor relationships to ensure proper classification based on IRS guidelines (degree of control, financial relationship, and type of relationship). Create a complete list of all contractors paid during the year and cross-reference it against your accounting records to ensure no one is missed.
• Reporting bonuses and supplemental wages incorrectly. Year-end bonuses and supplemental wages must be reported correctly on Form W-2 and are subject to specific withholding rules. A common mistake is forgetting to include bonuses paid in late December on the current year's W-2, or miscalculating tax withholding on supplemental wages.
  • Avoid This Mistake: Include all bonuses paid during the calendar year in Box 1 of the W-2, regardless of when they were earned. Also, make sure you're using the correct withholding method (flat 22% rate or aggregate method) for bonus payments and verify that all taxes are properly withheld and deposited.
• Failing to update payroll systems. After filing year-end forms, many businesses forget to update their payroll systems for the coming year. Failing to make these updates can result in incorrect withholding amounts and compliance issues in the new year's first payroll.
  • Avoid This Mistake: Before processing your first 2026 payroll, verify that all system updates are complete and test your first payroll run to catch any errors. This includes updating tax tables, implementing new wage rates to comply with minimum wage increases, adjusting the Social Security wage base, and updating any benefit contribution limits.

The best way to avoid these mistakes is to start your year-end preparation early. Create a detailed checklist of all tasks, deadlines, and required forms, and set up a systematic verification process to review employee information, tax calculations, and filing requirements.

What's New for the 2026 Tax Year?

The 2026 tax year brings important changes that will affect your payroll operations and tax obligations. Understanding these updates now will help you prepare your payroll systems and avoid compliance issues in the new year.

Social Security Wage Base Increases to $184,500

The Social Security wage base will increase from $176,100 in 2025 to $184,500 in 2026. This is an increase of $8,400, meaning employers will pay more in FICA taxes for high-wage employees. Employers must pay a 6.2% Social Security tax on employee wages up to this limit.

For example, if you have an employee earning $190,000 annually, you'll pay Social Security taxes on $184,500 (6.2% × $184,500 = $11,439 in employer taxes). This is $520.80 more than you paid in 2025. Medicare taxes have no wage cap and continue at 1.45% on all wages.

State Minimum Wage Changes Effective January 1, 2026

At least 18 states are implementing minimum wage increases on January 1, 2026. The largest increases will take place in the following states:

• Hawaii: Increasing from $14.00 to $16.00 per hour (+$2.00)
• Rhode Island: Increasing from $15.00 to $16.00 per hour (+$1.00)
• Connecticut: Increasing from $16.35 to $16.94 per hour (+$0.59)
• New York: Increasing by $.50 per hour
  • New York State: Increasing from $15.50 to $16.00 per hour (+$0.50)
  • New York City, Long Island, and Westchester: Increasing from $16.50 to $17.00 per hour (+$0.50)

Other states with expected minimum wage increases include Arizona, California, Colorado, Maine, Michigan, Minnesota, Missouri, Montana, New Jersey, Ohio, Oregon, South Dakota, Vermont, Virginia, and Washington. It’s important to check with your state and local jurisdictions to stay informed about any changes to minimum wage rates.

Updated IRS Filing Requirements

There is only one new update for 2026. However, it may be helpful to review the updates from 2025 to ensure accuracy.

• Form 1099-K Reporting Threshold Update (NEW): Beginning in calendar year 2026, the reporting threshold for Form 1099-K increases from $2,500 in 2025 to $20,000 in 2026.
• E-Filing Threshold: Businesses must e-file if they have 10 or more information returns across all form types (W-2s, 1099s, etc.). This threshold has been in effect since January 1, 2024 and continues to apply this year.
• Form 1095-B/C Changes: Employers are not required to automatically distribute Form 1095-B and 1095-C to all full-time employees. Instead, they can post a notice on their website and provide forms by January 31, 2026, or 30 days after the request date, whichever is later. There have been no significant changes to Form 1095-B/C itself or to the codes for 2024-2025 reporting.

The IRS has also raised penalties for late filing and failure to file information returns, making accuracy and timeliness critical.