Year End Payroll Checklist for Your Business
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. From end-of-year reporting and taxation to preparing for 2021, there are numerous steps 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. 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.
Set compensation for next year
As you prepare your budget for the coming year, you may want to factor in 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 2021 will be $142,800, which as an employer will result in paying more FICA taxes, as the 6.2 percent share is applied to this higher wage base. For hourly workers, check to see if there is a minimum wage rate increase for your location next year. Over 20 states will see a minimum wage rate increase, including California, Florida, Illinois, Missouri, Nevada, and many other states and cities. Most wage increases become effective January 1, 2021, so it's important to take this into account when determining compensation.
Set year-end bonuses
Many companies choose to offer annual bonuses to employees. Bonuses are 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 2020 bonuses in 2021, they're deductible in 2021.
- If you are an accrual basis business: Bonuses declared (and accrued) before the end of the year are deductible in 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 majority (more than 50%) owners.
Advise employees about unused benefits
Some of the benefits that employees earned or paid for in 2020 may expire at the end of the year. Consider company policy 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 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 (e.g., 30 days after the close of the year) for expenses incurred in the previous year. For example, an employee may submit reimbursement for a medical expense incurred on December 15, 2020, by January 30, 2021. A medical FSA can 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 $500. The FSA cannot offer both a grace period and carryover option. Advise employees about the terms of your plans.
Confirm employees' identifying information
Inaccurate or outdated information for employees can lead to costly delays and reprints of W2s. 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.
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 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 a portion of Social Security taxes through the end of 2020. 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 2021 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, 2021.
Prepare updated labor law posters for the next calendar year
As an employer, you are required to display certain labor law posters in your primary place of business. Labor laws change frequently, so you must verify that you have the latest versions of any posters explaining the most current versions of the applicable laws. To avoid costly fines for outdated posters, review your state poster requirements and check the Department of Labor website for the most current versions of labor law posters, including Employee Polygraph Protection Act (EPPA), Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Occupational Safety and Health Act (OSHA) posters.
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.
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. 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. If you've been using a bi-weekly pay period, for example, you may decide to switch to a monthly pay period in the new year.
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 year end payroll 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.
Distribute W-2 forms to all employees
Once the final pay period has ended and you have reviewed each employee's payroll calculations, you can print and distribute W-2 forms. Employees must receive a copy (or have access to download a copy) of their Form W-2 by January 31st of the following calendar year, so these forms must be calculated and distributed quickly.
File tax forms with the IRS and deposit taxes owed
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, W-2 forms for each employee, and W-3 forms for employees. 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 15th to file personal income taxes each year, business tax returns and any taxes owed are generally due by March 15th.
Schedule any bonus payrolls
You may decide to pay your employees an annual bonus as a show of goodwill. Annual bonuses are also deductible on your business tax return. If you claim a tax deduction on the current year's tax return for bonuses paid, you must distribute the bonuses to employees by December 31st if you are a cash-based business or March 15th of the following year if you are an accruals-based business.
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.
With a bit of advanced planning and this helpful year end 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 avoid non-compliance fines and penalties, meet all required deadlines, and establish payroll practices that will help you find and keep qualified workers through the new year.
* 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