The Ultimate Year-End Payroll Checklist for Small Businesses

Picture this: It's December 31st, and you're scrambling to organize payroll documents while your employees anxiously await their W-2s. 

Sound familiar? You're not alone. According to the IRS, roughly 40% of small businesses pay an annual average of $845 in payroll penalties due to missed deadlines or incorrect filings.

Let's make sure that doesn't happen to you this year. Here’s a year-end payroll checklist to help make the year-end countdown a happy occasion instead of a dreaded one.

What’s a year-end payroll checklist?

Just when you thought you had enough on your plate, year-end payroll lands on your desk like an unwelcome surprise. While your employees are planning their weekend, you're staring at a mountain of tax forms wondering where to start. 

Don’t worry—we've got this. To get you started,here are the six essential areas your year-end payroll checklist needs to cover:

1. Employee information
2. Wage and tax reporting
3. Benefits and deductions
4. Tax filings
5. Accrued paid time off (PTO)
6. Compliance updates

Let's break these down into bite-sized pieces you can tackle one at a time—no accounting degree required.

1. Employee information

Employee information is the most foundational element of your year-end payroll process. Once you have this down, everything else falls into place. Here are the steps you follow to confirm your employee information:

• Verify current addresses for W-2 delivery. Send a company-wide email as early as possible asking everyone to verify their address. If this cross-checking feels like a pain, it's easier than dealing with returned mail in January!
• Update any changes in employee status. Did anyone switch from contractor to full-time? Part-time to full-time? Make these updates now before they affect your tax calculations.
• Confirm Social Security numbers are correct. One wrong digit can trigger an IRS notice. Double-check against employees' actual Social Security cards if you haven't already.

2. Wage and tax reporting

This is when those old math classes come in handy. Get ready to crunch some numbers!

• Review all wage calculations. Take a quick scan of your payroll reports for any numbers that look off. Did Jim really work 160 hours of overtime that week, or did he take an hour or two off to sleep?
• Double-check bonus and commission payments. Did you hand out any spot bonuses or sales commissions this year? Make sure they're properly recorded and taxed. Future-you will thank present-you for this one.
• Verify tax withholding rates. Check employee tax forms to make sure their withholdings match their W-4s. No one wants a surprise tax bill in April!

Here's a pro tip that could save you hours of headache: Run a year-to-date payroll report now to make sure the numbers line up. If something looks funky (and something almost always looks funky), you'll have time to fix it before the year-end crunch. Plus, you'll feel like a payroll genius when everything balances perfectly at year-end.

3. Benefits and deductions

We’ve already talked about checking on tax withholdings, but what about insurance and retirement? Better check on those now:

• Audit retirement plan contributions. Make sure you haven't exceeded the annual limits! Over-contributions can be a pain to address.
• Review health insurance deductions. Did anyone change their health plan mid-year? Check that their deductions adjusted accordingly.
• Check FSA and HSA limits. Like retirement plans, these accounts have annual caps. Check what the caps are in your case and stay within them.

4. Tax filings

When you’re running a business, every season is tax season. To make it as painless as possible:

• Gather all quarterly tax returns. Pull out those quarterly 941s you filed (or should have filed) and collate them together.
• Review state unemployment rates. Your state unemployment rate might have changed without you noticing. Check now to avoid a surprise bill later.
• Prepare for annual filings. Yes, there are more forms coming. But handling them now means fewer "urgent" emails from your accountant in January.

5. Accrued Paid Time Off (PTO)

Your business’s PTO policy can have a significant influence on these calculations. As you’re gathering everything together:

• Calculate remaining vacation days. Run those PTO reports and look for any unusually high balances—like that one employee who somehow hasn't taken a day off in three years. (Now’s also a great time to review your policy. Something might be worth shifting to prevent these discrepancies from happening!)
• Review your carryover policy. Does your business allow vacation days to roll over year after year? If your team is about to lose their vacation time, notify them quickly so they can take advantage of their owed benefits.
• Check state-specific PTO laws. Some states have specific requirements about PTO payouts. These laws can change, so check back every year.

Pro tip: Send out PTO balance notifications as early as possible. Your employees will appreciate the heads-up, and you'll avoid the end-of-year vacation request tsunami.

6. Compliance updates

Compliance may be last, but it’s definitely not least. Staying compliant with the laws and regulations in your region can make the difference between sleeping soundly and sleepless nights.

• Review minimum wage changes. States often announce wage increases that take effect January 1st. Check if your state is subject to one—before someone else finds out for you.
• Update workplace posters. If you have labor law posters in your break room, update them ASAP!
• Check for new state regulations: Take a quick peek at your state's labor department website for any new labor laws that might be coming into effect.

Remember, staying compliant isn't about being perfect—it's about making a good-faith effort to keep up with requirements.

💡Time-saving tip:Payroll tools like Homebase automatically handle all these checklist items for you. From tracking employee status changes to managing PTO balances and staying on top of compliance updates, using Homebase is like having a payroll expert on staff—and that’s handy no matter how you feel about math!

Your step-by-step guide to year-end payroll preparation

Whether you’re an accounting whiz looking for a refresher or totally lost in the payroll sauce, this step-by-step guide breaks down exactly what you need to do—no accounting degree required.

1. Reconcile your payroll reports.

Catching mismatched deposits now will save you a world of headaches later. Most payroll systems auto-generate reports, but some of them are notorious for dropping random pay periods when you make mid-year changes.

Here's the quickest way to check if something's awry:

• Pull your last four 941s and match the totals. If they don't add up, track down the problem.
• Run a YTD report and look for any employee making way more (or less) than they should.
• Check your last bank draft against your last payroll run. Different numbers mean trouble!

2. Verify employee classifications.

The Department of Labor is on a misclassification crusade, and they're targeting small businesses first. Why? Because they’re the ones too busy putting out daily fires to notice they have contractors working like employees.

Here's a 5-minute audit to avoid a $10,000 penalty:

• Any employee working 40+ hours consistently each week is probably not a contractor, no matter what your paperwork says.
• Look for hourly folks who suddenly became salaried this year. Do your documents reflect everything they need to?
• If you have remote workers in different states, flag them for a proper classification review (before your state does it for you).

3. Review and issue W-2s and 1099s.

When it comes to 1099s, the IRS is looking at three things: contractors that make more than your employees, round payment numbers that look made up, and total contractor payments that seem high for your industry.

• Start with your highest-paid contractors. Any discrepancies here? These are the employees most likely to trigger IRS attention.
• Got anyone close to the 1099 threshold? Double-check their total payments now.
• Missing addresses? Send one mass email ASAP (not twenty individual messages later).

4. Submit payroll tax filings and payments.

Especially if your business has grown this year, check on deposit frequency changes and make sure you’ve been paying when you need to. Miss one deposit deadline because you didn't realize you became a semi-weekly depositor, and you're looking at a 10% penalty.

• Look at your last four payroll tax deposits. Missing any? Fix that ASAP.
• Check your state unemployment account.
• Got any tax notices sitting in your "deal with it later" pile? “Later” just became “now.”

5. Archive payroll records.

Most payroll systems only keep detailed records for 3 years, but the IRS can audit up to 4 years back. And state agencies often want 6+ years of records. 

Your payroll software won't warn you about these gaps until it's too late. Here's your real-world backup strategy:

• Create a folder labeled "2024 Payroll—KEEP."
• Throw in copies of all tax filings (paper or digital).
• Save screenshots of your final payroll reports. This is especially important if your payroll system is prone to updates that change how you access information.

6. Review employee benefits.

The IRS penalties for incorrect benefit reporting on W-2s start at $50 per form and can hit $570 per form for intentional disregard. Here's the 10-minute check that prevents 90% of common benefit reporting errors:

• Pull your December benefits invoice and highlight every employee name.
• Cross-reference against your active employee list. If any employees are still listed who don’t work for you anymore, that's money walking out the door.
• Document all benefit rate changes taking effect January 1st (including FSA/HSA limits, 401(k) matches, and health premiums).

7. Notify employees.

Communication is everything when it comes to year-end payroll. Your employees might not always know what’s happening behind the scenes, but keeping them in the loop means they can bring things to your attention if anything seems off. Avoid confusion and complaints by being proactive:

• Send W-2 and 1099 reminders. Let employees and contractors know when they can expect these forms and how to access them. Include instructions for updating addresses.
• Explain benefits changes for the new year. Whether it’s health premiums, retirement contributions, or PTO policies, make sure employees are crystal clear on what’s changing.
• Provide a payroll timeline. Share deadlines for submitting year-end PTO requests or confirming personal info. This simple step can save you a lot of last-minute stress.

Remember, an informed team is a happy team. A quick email or team meeting can prevent misunderstandings and build trust. Plus, it’s a great way to wrap up the year on a professional (and organized!) note.

💡Time-saving tip: If reading through these seven steps made your head spin (or made you realize how many hours you're spending on payroll), Homebase's payroll tools were built specifically for small businesses like yours. They automate everything from bank reconciliation to contractor classification. 

Instead of spending your weekends double-checking tax forms and chasing down employee information, you could let smart software handle it all automatically—for less than the cost of one payroll mistake.

Critical deadlines you won’t want to miss

Let's talk about the dates that should be circled in red on your calendar. Missing these deadlines isn't just inconvenient—it's expensive. In 2022, the IRS collected over $13 billion in civil penalties, with a significant portion coming from missed payroll deadlines.

Specific tax filing deadlines

You’re trying to grow your business, juggling inventory counts and staff schedules, when suddenly tax forms start showing up in your inbox. To help you figure out which ones to address ASAP, we’ve put together a breakdown of exactly when everything is due. 

Print this list and stick it somewhere visible. Your future self will thank you!

• January 31: Most states require W-2s and year-end reconciliation forms
• Quarterly state unemployment reports: Due dates vary by state.some text
  • Most common deadlines: April 30, July 31, October 31, January 31
• State withholding returns: Check your state's department of revenue website.some text
  • Some states require monthly deposits.
  • Others follow federal deposit schedules.
  • Annual reconciliation forms are typically due January 31.

Employer tax payment deadlines

To avoid that stomach-sinking “forgetting something feeling,” take an extra minute to note these critical tax deadlines. Think of them as non-negotiable supplier payments, except this supplier is the IRS.

• Quarterly Federal Tax Returns (Form 941):some text
  • Q1: April 30
  • Q2: July 31
  • Q3: October 31
  • Q4: January 31
• Annual Federal Returns:some text
  • Form 940 (FUTA Tax Return): January 31
  • Form 945 (Annual Return of Withheld Federal Income Tax): January 31
• Federal Tax Deposits:some text
  • Monthly depositors: Due by 15th of following month
  • Semi-weekly depositors: Due by Wednesday or Friday following payday
  • Next-day deposits required for $100,000+ in tax liability

Penalties for missing deadlines (and how to avoid them)

Between managing your staff, keeping customers happy, and growing your business, bureaucratic deadlines can slip through the cracks. But the IRS doesn't care if you missed a deadline because you were covering for a sick employee or dealing with a broken freezer. 

Here's what those missed deadlines could actually cost you (and some practical ways to make sure that never happens):

• Late W-2/1099 filing penalties:some text
  • Within 30 days: $50 per form
  • 31 days to August 1: $110 per form
  • After August 1: $290 per form
  • Intentional disregard: $580 per form
• Late payroll tax deposit penalties:some text
  • 1-5 days late: 2% of unpaid tax
  • 6-15 days late: 5% of unpaid tax
  • 16+ days late: 10% of unpaid tax
  • Over 10 days after first IRS notice: 15% of unpaid tax

Tips for avoiding penalties:

1. Set up automated calendar reminders 30, 14, and 7 days before each deadline.
2. Use payroll software that tracks deadlines automatically.
3. Consider enrolling in EFTPS for electronic tax payments.
4. Keep a compliance calendar with all federal and state deadlines.
5. Work with a payroll professional during busy seasons.

While these deadlines and penalties might seem daunting, breaking them down by month makes them more manageable. The most successful small businesses treat tax deadlines like inventory orders or supplier payments—they're simply part of the regular business rhythm. 

By planning ahead and staying organized, you can turn these stress-inducing deadlines into routine business operations.

Tips for a stress-free year-end payroll process

The key to managing these deadlines successfully is creating a system that works for your business. Whether it's setting up calendar alerts, using a dedicated compliance tracking tool, or working with a payroll service, having a reliable process in place before the busy season hits can make all the difference.

Here are some tips for staying organized during year-end payroll processing:

Start preparations early.

The biggest mistake small business owners make is waiting until December to think about year-end payroll. By October, you should:

1. Run a year-to-date payroll report to catch any oddities.
2. Send out employee information verification requests.
3. Schedule time with your accountant or tax advisor.
4. Review your payroll budget for any year-end bonuses.

Remember: Every hour spent preparing in October saves three hours of scrambling in December.

Conduct mid-year payroll audits to minimize errors.

Don't wait for the IRS to find errors—catch them yourself. Set calendar reminders for these quick checks:

• Monthly: Compare total hours worked against overtime payments
• Quarterly: Review employee classifications and tax withholdings
• Semi-annually: Audit benefit deductions and PTO accruals

Pro tip: Create a simple spreadsheet to track these audits. It takes 15 minutes now, and could save thousands in penalties later.

Keep your team in the loop.

Your employees are your best allies in smooth year-end processing. Here's how to keep them engaged:

• Send monthly reminders about updating personal information.
• Create a simple FAQ document about W-2s and year-end procedures.
• Set clear deadlines for submitting final expenses or time cards.
• Provide updates about any benefit changes for the new year.

Leverage the right tools.

If you're still processing payroll manually, you're spending valuable time on tasks that could be automated. Every hour spent double-checking tax calculations or hunting down employee information is an hour you could invest in serving customers or growing your business.

Modern payroll software isn't just a convenience—it's a strategic business decision that pays for itself. Between preventing costly errors, automating repetitive tasks, and keeping your records audit-ready, good payroll software is like having a dedicated payroll specialist on your team for a fraction of the cost.

💡Time-saving tip: Year-end payroll doesn't have to be a full-time job. Small business owners using Homebase report spending 5 hours less per week on payroll tasks. That's 260 hours saved per year! Homebase offers support for things like:

• Employee information management. Instead of chasing down current addresses and tax forms, Homebase keeps employee records organized and accessible year-round.
• Time tracking & PTO. Automatically calculate overtime, track PTO balances, and export reports for year-end reconciliation.
• Document storage: Keep all your payroll records in one secure place, ready for tax season or audits.
• Smart reminders: Get notifications about upcoming deadlines and tasks, so nothing falls through the cracks.

The best part? Homebase costs less per month than most businesses spend on coffee. Start a free trial today and set yourself up for easier year-end processing.

FAQs about year-end payroll

What is a year-end payroll report?

A year-end payroll report is a comprehensive document that summarizes all payroll activities for the calendar year, including total wages paid, taxes withheld, and benefits deducted. This report helps businesses verify their payroll data before generating W-2s and 1099s, and serves as supporting documentation for tax filings.

What documents are needed for year-end payroll processing?

For year-end payroll processing, businesses need several essential documents. Start with all quarterly payroll tax returns (Form 941) and current employee W-4 forms with updated contact information. 

You'll also need complete records of wages, tips, and other compensation paid throughout the year. Benefit contribution records and PTO accrual and usage documentation are crucial for accurate reporting. 

Don't forget state and local tax documentation, as requirements vary by location. If you work with contractors, gather all independent contractor payment records to prepare 1099 forms.

When should you start year-end payroll processing?

Year-end payroll processing should begin in October to ensure adequate time for all critical tasks. The process starts with reviewing employee information for accuracy and completeness. 

Next comes the crucial step of reconciling payroll records across all systems and documentation. This early start provides ample time to correct any discrepancies discovered during reconciliation. By December, you'll be processing final adjustments rather than scrambling to catch up, ensuring you meet all tax filing deadlines without last-minute stress.

How much does it cost to process year-end payroll?

Year-end payroll processing costs vary significantly based on business size and complexity. Small businesses with 1-10 employees typically spend between $200-500 on year-end processing. Medium-sized businesses employing 11-50 people can expect to pay $500-1,500. Larger businesses with over 50 employees often invest $1,500 or more in year-end payroll processing. 

Implementing payroll software can substantially reduce these costs while improving accuracy.

What happens if you miss a payroll tax deadline?

Missing a payroll tax deadline triggers a cascade of increasingly severe penalties. For payments made 1-5 days late, the IRS charges a 2% penalty. This increases to 5% for payments 6-15 days late, and jumps to 10% for payments more than 16 days late. If you wait until after receiving an IRS notice, the penalty rises to 15%. Additionally, interest continues to accrue on all unpaid amounts, making prompt payment crucial for avoiding escalating costs.

Can small businesses do year-end payroll themselves?

While small businesses can process year-end payroll themselves, it's risky due to complex tax regulations and steep penalties for errors. Most successful small businesses choose one of three approaches: using payroll software to automate calculations and filings, working with a dedicated payroll service provider, or partnering with an accountant for year-end processing. 

Each option offers different levels of support and protection against costly mistakes. Modern payroll software providing an accessible balance of affordability and functionality.

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