2022 Year-End Payroll Checklist and Guide

As the end of the year approaches, it's important to make sure that your payroll year-end information is up-to-date. As you finalize your payroll activities and set compensation and benefits for 2023, use this year-end payroll checklist, which includes numerous steps for year-end payroll reporting and taxation, to help you stay on track.

Even if you're experienced with end-of-year payroll, it can be easy to overlook crucial steps at two critical junctures: the last payroll of the calendar year, and the first payroll of the new calendar year. Using an organized year-end payroll checklist can help make sure you don't overlook any major requirements from a payroll or benefits perspective.

What Is Year-End Payroll?

To prepare your business and employees for tax season, year-end payroll is the careful review and verification of your financial information during 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 any state and local tax departments.
• Identifying and preparing for any changes to local, state, and federal employment regulations that affect your business in the new year.

When Does the 2022 Payroll Year End?

You should do everything possible to not miss important payroll year-end dates for submitting payroll forms and tax information. Business tax obligations for year-end payroll 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 (March 15 for partnerships, multi-member LLCs, and S-corporations; April 17 for C-corporations);
• Forms W-2 and W-3 for each employee by Jan. 31;
• Form 1099-NEC for contractors by Jan. 31;
• Form 940 and fourth quarter FUTA taxes deposited by Jan. 31; and
• Quarterly Form 941 tax return or the annual Form 944 by Jan. 31, depending on when you file.

Be mindful of the fact that proper preparation for year-end payroll taxes begins well before the end of the year. It's always a good idea to keep accurate and up-to-date payroll records throughout the year to help you meet required deadlines and make these tasks as straightforward as possible.

What Forms Do You Need for End-of-Year Payroll?

As an employer, you're required to send employees and contractors specific tax forms by the end of January, as well as 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) which is based on the business's annual payroll.
• Form 941: Due quarterly and used to report wage withholding for income taxes as well as the employees' share of Social Security and Medicare (FICA) taxes, plus 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 businesses must file Form 1095-B to report information on individuals provided minimum essential coverage, and employers with more than 50 employees must file Form 1095-C on health insurance coverage offered to full-time employees and their dependents and if self-insured, they must also provide information on individuals enrolled in coverage. Failure to file or furnish these forms in a timely manner could lead to penalties.

Payroll Checklist: How To Prepare Before the Last Payroll of the Calendar Year

There are many steps involved in preparing 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 processed.

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 costs such as employee compensation and payroll taxes.

Keep in mind that the wage base for the Social Security portion of FICA in 2023 will be $155,100, 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 non-exempt employees, check to see if there are any 2023 minimum wage rate increases for the states and localities in which you operate. Businesses in certain states also need to check if there are any salary threshold changes taking effect that would require adjustments to be made for their exempt employees.

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 bonuses in 2022, they're deductible for 2022. If you pay 2022 bonuses in 2023, they're deductible in 2023.
• 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 percent) owners.

Inform Employees About Unused Benefits

Some of the benefits that employees earned or paid for in 2022 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: Based on company policy and/or applicable law, 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 Dec. 15, 2022, by Jan. 30, 2023. 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 $570 (2022). The FSA cannot offer both a grace period and carryover option. Advise employees about the terms of your plans.

Confirm Employees’ Identifying Information

When it comes to payroll, the end of the year 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 2022. 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 in 2023.

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

As mentioned earlier, you 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. 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.

Payroll Checklist: What To Do After the Year’s Last Payroll and Before the First Payroll of the New 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 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 Jan. 31 of the following calendar year, so these forms must be calculated and distributed quickly.

File Year-End Payroll Tax Forms With the IRS and Deposit Taxes Owed

In addition to the payroll year-end dates mentioned earlier, part of your business tax obligations includes paying taxes owed in a timely manner. 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 Applicable State/Local Minimum Wage Changes

As of the time of this writing, many states and localities have announced minimum wage rate increases, many of which are in response to inflation rates that continue to impact individuals and businesses nationwide. Scheduled increases are planned in numerous states and localities with additional increases likely to be announced before the end of the year. Since many wage increases become effective Jan. 1, 2023, it's important to take this into account when determining compensation for the upcoming year.

Ensure You Start 2023 Payroll Strong

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. Consider these factors as you finalize your payroll activities for this year, and work with a payroll provider to help you avoid fines and penalties for non-compliance, meet all required deadlines, and establish sound payroll practices.