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10 Steps to Simplify Your Year-End Payroll Process

Contributor: Becci Malooly, Implementation Specialist

November 10th, 2023 | 6 min. read

By Tony Calavitta

The date is December 31st and the year’s end is quickly approaching.

As you eye the clock, willing the hands to move just a little slower, the notion of a carriage turning back into a pumpkin at midnight seems like a minor inconvenience when compared to the year-end payroll pile-up preventing you from ringing in the New Year.

Sound familiar?

For many businesses, January 1st is more of a deadline than a celebration, with an endless array of critical administrative tasks and compliance requirements to be met before the clock strikes twelve.

Here at Combined, we understand the weight of these year-end responsibilities and want to help you start the New Year off right. And, this article is our way of preparing you to have a smooth and stress-free end-of-year payroll process.

In this article, we will discuss 10 steps to ensure that your year-end payroll is accurate, compliant, and timely.

By reading to the end, you’ll have a comprehensive year-end payroll checklist – apply it to your payroll process to leave any end-of-year panic in the past.

Preparing for year-end payroll is critical

As the year winds down, it's essential for businesses to focus on payroll responsibilities. This means going beyond standard day-to-day procedures and addressing a barrage of important tasks like adapting to updated tax regulations, ensuring compliance with evolving wage laws, and handling irregular payroll circumstances.

As if that list alone doesn’t send your blood pressure soaring, correctly completing each task on time is paramount for a seamless transition into the new year.

With that in mind, preparation is key to handling year-end payroll perfectly.

What’s at stake? – Why preparing for year-end payroll is critical

Year-end payroll is more than an annual chore – it's fundamental to maintaining your business's compliance, financial stability, and employee morale.

Let's explore the main reasons why getting year-end payroll right is crucial.

To establish compliance with legal requirements

Year-end payroll is heavily regulated, with strict guidelines on reporting and filing. Noncompliance can lead to hefty fines and legal complications. Ensuring everything is in order protects your business from unnecessary expenses and legal entanglements.

To guarantee accurate employee compensation

Accurately reporting and processing all forms of employee compensation, including bonuses and benefits is integral to business stability and success. Apart from compliance concerns, errors can result in employee dissatisfaction and disputes, affecting workplace morale and trust.

To prevent unnecessary tax liabilities

Proper handling of taxes – both for your business and your employees – is an imperative aspect of year-end payroll. Mistakes can not only lead to tax penalties but can also affect employees' tax filings.

To facilitate analytical financial reporting

Year-end payroll data is crucial for financial reporting. It directly affects your business's expense metrics and plays a pivotal role in strategic budget planning for the upcoming year.

To promote heightened employee satisfaction

Employees are the heart of every business and ensuring they are paid accurately and on time keeps that heart beating.

In other words, precise payroll processing is vital to employee retention. It reflects commitment to your employees which builds trust, contributes to overall job satisfaction, enhances performance, and increases business productivity.

10 essential steps to prepare for year-end payroll

Now that you understand why year-end payroll is so crucial, let's talk about how you can make sure your preparation process is up to par.

These 10 steps will guide you through how to prepare your end-of-year payroll so that you can manage it from start to finish with complete confidence.

1. Verify employee information

Ensuring the accuracy of employee information is a foundational step in the year-end payroll process. This not only facilitates smooth handling of W-2 forms but also helps to maintain compliance with tax regulations.

To complete this step, pay attention to each of the following:

Basic employee information

This may come as a surprise, but basic employee information often contains inaccuracies that can lead to filing errors, delayed tax document deliveries, and potential issues with the IRS.

  • Social Security Numbers (SSN) – Verify the accuracy of each employee's SSN.

  • Addresses – Keep all employee addresses up-to-date.

  • Names – Confirm that the employee names in your records match those on official documents.

Terminated employee records

It's important to keep the records for former employees up to date. This includes ensuring that their address information is current to avoid any issues while sending out necessary tax documents.

Federal vs. state forms

When managing year-end payroll, it's important to recognize that there are separate federal and state tax forms that must be completed. This dual requirement means you need to stay informed about both federal and your state's specific tax regulations and make sure that all necessary forms are accurately filled out and submitted.

2. Confirm compliance with wage updates

Does your payroll system reflect the most current minimum wage laws?

Well, it needs to. Minimum wage rates must be updated in accordance with current statutes and reported accurately. This involves a thorough review to ensure that all employees' wages align with updated standards.

3. Manage tax exemption status

Employees who are exempt from federal income tax withholding need to renew this status every year. This exemption applies to those who meet specific criteria, such as not having any federal income tax liability in the previous year.

It's important to remind employees to submit a new W-4 form by February 15th of the upcoming year to continue their exempt status. Employers have the responsibility to begin withholding federal tax from the paychecks of employees who do not provide an updated W-4 by this deadline.

Additionally, employees who have undergone significant life events, which could alter the number of allowances they claim, should be encouraged to submit a new W-4 to reflect these changes.

4. Reconcile year-end forms

Cross-checking year-end forms like W-2s and 1099s is a pivotal step in your payroll process.

It's essential to meticulously prepare and review these forms so that they properly represent each employee's earnings and deductions.

To effectively manage this process:

  • Double-check earnings and deductions – Go through each form to verify that all earnings and deductions are correctly reported. This includes wages, bonuses, and any other compensation.

  • Assess for alignment with IRS guidelines – Ensure that the information on your forms is in full compliance with the latest IRS regulations for accurate filings.

  • Review for consistency – Compare the data on these forms with your internal payroll records to avoid any discrepancies.

  • Prepare for distribution – Once verified, prepare these forms for timely distribution to your employees and necessary tax authorities.

5.      Update payroll tax rates

Don’t forget to update your payroll system to reflect all changes to tax rates, including:

  • Federal taxes – These can change annually, so it's important to stay informed about current federal income tax brackets, as well as Social Security and Medicare tax rates.

  • State and local taxes – Given that these rates can vary by location, make sure to check for any updates that apply to your business's area.

  • Unemployment taxes – The rates for unemployment taxes can vary, influenced by factors such as your company's history of unemployment claims. It's important to review any notices you receive to ensure that your payroll system reflects current unemployment tax rates.

6. Audit and update employee benefits

Review all employee benefits payroll deductions like health insurance contributions and 401(k) retirement plan deductions. Make sure to check pre-tax and post-tax distinctions and coordinate with benefits providers for any plan updates.

7. Process bonuses correctly

Confirming bonus payrolls is another critical aspect of year-end payroll management.

Here are a few necessary considerations when handling bonuses:

  • Bonus taxation method – Bonuses are generally subject to a flat rate for both federal and state taxes. This distinct taxation method needs to be accounted for when processing payroll.

  • Separate or combined with regular payroll – It's advisable to process bonuses separately from regular payroll. Combining them could inadvertently push an employee into a higher tax bracket, affecting their overall tax liability.

  • Garnishments on bonuses – While garnishments should be applied to bonus wages once, regularly occurring deductions should not since they are already accounted for in the regular payroll cycle.

  • High-value bonus taxation – For bonuses where the federal tax amount exceeds $100,000, a wire transfer must be made. These taxes are also due the day after the check date and delays in depositing them past this timeframe are subject to enforcement action,

8. Address special payroll situations

Proactively addressing any unusual situations that emerge is essential. This includes handling tasks like issuing manual checks, submitting 1099 amounts, or applying specific adjustments to the payroll.

Taking care of these situations before the year ends is key to maintaining the integrity of your payroll records. Handling these unique cases promptly can significantly reduce the likelihood of needing to make amendments later on. This not only streamlines the process but also assures that W-2 reporting for your employees is precise and error-free.

9. Ensure timely tax deposits and filings

Completing tax deposits on time will prevent late penalties and interest charges. With this in mind, It's important to be vigilant about deposit deadlines.

Note: Be prepared for situations where zero-dollar filings might be necessary, which occur in instances where there were no payrolls processed during certain periods of the year.

10. Prepare for Affordable Care Act (ACA) reporting

Review all information related to ACA reporting requirements.

This step involves making certain that all relevant information necessary for ACA reporting is in order and ready to be processed by the annual March deadline.

Take the next steps to simplify your year-end payroll process

You’re here because year-end payroll isn’t easy.

Here at Combined, we are here to make it a much simpler process – and, with the right preparation, completing your end-of-year payroll can be just that.

By reading this article, you are now equipped with 10 steps to steer you and your business’s payroll operation into a successful New Year.

But even with this comprehensive guide, managing your year-end payroll may still be complex. So, if you need assistance, our team of payroll experts is ready to help you tackle this task.

Schedule a meeting – Let’s transform your year-end payroll situation into a seamless success!

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This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.