A Guide: Payroll Year End

Written: October 8th, 2025

As the calendar winds down, small business owners have plenty on their plates — from wrapping up projects to planning for the year ahead. But before you can close the books, there’s one crucial task to tackle: year-end payroll. This process ties together all your payroll and tax responsibilities for the year, ensuring your records are accurate and compliant. Getting it right now will save you headaches (and potential penalties) later.

Let's take a look at some key areas to focus on when it comes to payroll and HR at year end.

Year-End Payroll Checklist: Before the Last Payroll

Before you run your final payroll of the year, it’s important to take a step back and make sure everything is in order. A little preparation now can prevent costly mistakes and ensure a smooth start to the new year. Use our checklist to stay organized and keep your payroll process on track.

Start Early and Stay Organized

The best way to approach payroll year-end is to get started early. Starting to think about what you need to do in October is best. Trying to cram all the necessary tasks into the final weeks of the year can lead to missed deadlines and costly mistakes. Begin by creating a year-end checklist (or download our checklist!) of everything you need to complete. This can include verifying employee information, preparing bonus payrolls, and ensuring tax forms are ready for distribution.

By starting early, you give yourself enough time to make sure that everything is in order. Many industries experience an end-of-year rush, and personal lives are hectic, so waiting until the last minute can be detrimental to success. Staying organized is key, so keep all your necessary documents, forms, and records easily accessible and well-organized.

Verify Your Business Information

Before diving into employee data, make sure your own business details are accurate:

• Federal and state tax ID numbers
• Legal business name and address
• State unemployment rates

Even small errors here can lead to filing issues or penalties, so double-check this information early.

Confirm Employees' Identifying Information

You should audit all employee contact information, including names, addresses, social security numbers, and dates of birth. The Internal Revenue Service may impose a penalty for each W-2 with a missing or incorrect social security number or employee name of up to $550 per error! Ask employees to confirm their full name, Social Security number, address, and other additional contact information.

Review Employee Classifications

Now’s the time to confirm that employees are classified correctly. Are your exempt (salaried) employees truly exempt under federal and state law? Both wage and duties tests must be met for someone to qualify as exempt from overtime.

Misclassification can lead to back pay, fines, and other penalties—so review carefully and adjust if needed.

Review Compensation for Next Year

As you prepare your budget for the following year, it’s crucial to review any pay raises or any type of compensation for employees. Adjusting compensation proactively can help attract and retain top talent, boost morale, and support your overall business strategy for the year ahead. Be sure that you are paying non-exempt employees at least the minimum wage threshold in the state in which they are performing work and your exempt employees at least the minimum salary threshold.

Review Bonuses

If your business offers year-end bonuses, start thinking about these early enough to give yourself time to budget correctly. Decide how these bonuses will be processed, whether they will be distributed as manual checks or through direct deposit, and verify that all necessary tax withholdings are applied.

For businesses using a cash-basis accounting system, remember that bonuses paid in the current year are deductible for that year. If you’re on an accrual basis, ensure that bonuses declared before the end of the year are paid within 2½ months to count for the same tax year.

Remind Employees About Unused Benefits

Before the year wraps up, communicate with employees about any benefits that may expire, such as vacation days or flexible spending accounts (FSAs). Some FSAs follow a strict “use-it-or-lose-it” rule, while others may include a grace period or small carryover. Clear communication helps employees maximize their benefits and shows that your company values their well-being.

Record All Processed Paychecks

Before closing out the year, it’s crucial to review all processed employee paychecks to ensure accuracy and compliance. Make sure that every wage, bonus, commission, and reimbursement has been properly processed and reflected correctly. Taking the time to review these records will help avoid any discrepancies and simplify tax filing or corrections after the first of the year.

Review IRS Limits and Minimum Wage Changes

Before the new year begins, take time to review any changes to IRS limits and minimum wage rates. Updates to items like Social Security wage bases or retirement contribution limits can affect your payroll setup. Minimum wage rates may also increase at the state or federal level. Staying up to date with these changes will help you remain compliant and ensure your employees are paid correctly.

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

It is necessary to provide your employees with the proper end-of-year tax statements. Make sure to order and prepare all required documents before the conclusion of the year. Paper Trails will provide these forms to our clients at the appropriate times, or you can get them directly from the IRS. Staying proactive ensures your team receives their forms on time and helps your business remain fully compliant with the IRS and any state filing requirements.

Prepare for Holiday’s Payroll Processing

During the holiday season, banks and payroll companies may be closed on certain days. Be sure to know which days these are, and remember to submit your payroll early to ensure a timely payday for your employees.

Determine Your Payroll Policies for the New Year

It is very common for businesses to follow the same payroll schedule and policies year after year. However, this is not always best practice. With legislative updates happening frequently and better ways to support your employees evolving, consider making any necessary adjustments to your policies and procedures to better align with your business's goals and requirements in the new year.

Check for Special Circumstances

Review your payroll records for any unique or particular tasks that need to be completed. Some examples could include: 

• Newly hired employees who didn’t complete a W-4
• Employees with voided paychecks
• Third-party sick pay
• Employees with current payroll disputes

If any of these situations apply to your business, it is important to resolve them before the new year begins.

These are just a few of the key steps to help you prepare for payroll year-end. Every business has unique needs, and your process might look a little different depending on your setup, benefits, reporting requirements, and payroll provider.

To make things even easier, we’ll be releasing our full Year-End Payroll Checklist in the coming weeks — complete with detailed timelines and reminders to keep you on track. Stay tuned for the download!

Payroll Year-End FAQs

Why Is Year-End Payroll Important?

Year-end payroll ensures your taxes and employee records are accurate and compliant. It also sets the stage for better planning and budgeting in the year ahead. Managing this process correctly helps you avoid penalties and build trust with your employees.

What Happens if You Miss a Year-End Deadline?

Missing the year-end payroll deadline can have serious financial and legal implications for your company. In addition to penalties, your company may face audits or a deeper investigation into your payroll practices. Meeting the deadline is essential as it helps keep your business out of trouble and to allow employers to focus their time on the business itself.

What Tax Forms Are Required for Year-End Payroll?

Here are the key forms you’ll need to prepare and file:

• Form W-2: Reports annual wages for employees
• Form W-3: Summarizes W-2 information for the SSA
• Form 1099-NEC: Reports nonemployee compensation of $600 or more
• Form 940: Federal unemployment tax (FUTA)
• Form 941: Quarterly or annual payroll taxes

Having these ready and submitted on time ensures compliance and a smoother start to the new year.

Key Payroll Dates to Remember

• December 31: All wages, bonuses, and benefits must be processed to count for the current tax year
• January 31: Deadline to distribute W-2s and 1099-NECs and file Forms W-3, 940, and 941
• State deadlines: Vary by location—check your state’s requirements in January or February

Keeping a payroll calendar can help ensure you don’t miss any key filing dates.

How Do You Reconcile Payroll at Year End?

Reconciling payroll means making sure all pay, taxes, and deductions line up before filing your year-end forms. Follow these steps:

1. Review year-to-date totals for each employee.
2. Verify federal, state, and local tax withholdings.
3. Confirm benefit deductions and employer contributions.
4. Match totals across payroll reports and tax forms.
5. Fix discrepancies before filing.

Completing this review helps ensure your records are accurate and compliant.

Conclusion

Preparing for year-end payroll may seem like a daunting task but using a year end checklist will help keep your payroll organized. By starting early, verifying information, and planning for deadlines, small business owners can easily navigate through this stressful period. At Paper Trails, we are here to help you through all the complexities of payroll. With these tips you will be able to efficiently file your payroll and set yourself up for a successful year.