Payroll can become a stressor for small business owners, especially toward the end of the year. That’s why we gathered these top payroll reminders to make sure your end-of-year payroll processing goes smoothly. There are several steps you need to take as an employer to make sure you stay compliant with state and federal governments, as well as ensure your employees get paid.
In this Nav article, learn why you need to get ready for year-end payroll processing, the most common issues small business owners run into, which forms you’ll need to complete, and the exact steps to take before the year ends. And if you’re finding payroll is taking up too much time and energy, we list out the best payroll services at the end of the article that you can sign up for to lighten your workload.
Importance of Preparing for the End-of-Year Payroll
Prepping for payroll ahead of time is essential for a number of reasons. First, there are filing deadlines you have to hit as an employer. You’re required to send all of your employees W-2 statements to use for their personal tax returns by January 31, and you’ll want to check your employees’ information carefully ahead of time. Even small mistakes can lead to delayed filings and potential fees from the Internal Revenue Service (IRS).
Also, maintaining accuracy is vital for keeping your staff around. If employees are getting paid the wrong amount or their benefits are often incorrect, the employee may lose trust in your business and start looking for another job. The end of the year is the perfect time to make sure all your information and data entry is correct.
Common Concerns for Small Business Year-End Payroll Processing
Although every small business is unique, there are issues that most businesses face when dealing with end-of-year payroll. First (and perhaps most confusing), you’ll need to deal with upcoming tax filings and reporting requirements. We discuss the tax forms and procedures you’ll want to follow at the end of each year in the next sections.
Another common concern regards benefits for full-time or part-time employees, especially since this is often the time when retirement plans or premiums for health insurance get updated for the new calendar year. Although your employees may follow up on this, it’s your job as an employer to make sure that the choices each employee makes for the benefits end up being initiated.
Finally, you’ll need to make sure that you’re operating in a compliant manner and that you’re paying the appropriate taxes.
Common Payroll Forms to File at the End of the Year
There are several forms you need to fill out as an employer at the end of the year. Which forms you need to complete depend on your business, your income, and your industry, but the most common forms are:
- Form W-2, Wage and Tax Statement, by January 31. Order the forms and review records.
- Form W-3 if you pay more than one employee.
- Form 1094-C and Form 1095-C that confirm your employees are enrolled in health insurance as required by the Affordable Care Act (ACA).
- Forms 1099 if you paid independent contractors.
- Form 940 to file your federal unemployment tax return.
- Form 941 or Form 944, depending on your income level.
All year-end small business tax forms can be found at www.IRS.gov.
End-of-Year Payroll Reminders for Small Businesses
These payroll reminders for small businesses will help you start the new year off on the right financial foot. You’ll need to check your individual business’s payroll calendar closely since your year-end reminders are separated into two parts:
- Before you complete this year’s final payroll
- Before you complete the first payroll in 2023
1. Prepare for the last payroll of the year
There are several steps you’ll want to take to prep before you finalize this year’s last payroll.
First, make sure your employees’ tax information is accurate. You’ll need to prepare employee W-2s early next year, so it’s a good idea to check now to make sure you have the right details for them. Make sure you don’t need corrected or additional information for their:
- Legal name
- Social Security number
- Home address
You’ll also want to keep a lookout for the new state unemployment tax rate (your state should send this information to you). Note any changes to the wage base, which is the maximum amount an employee can be taxed for Social Security. If you use cloud-based accounting software, these numbers should be automatically updated for you, which makes things easier.
Also, take a hard look at your employee benefits. For example, if your employees had vacation time they didn’t take, some plans roll over and others pay out for the unused time, so plan accordingly. And reconcile any Social Security or Medicare taxes for previous or retired employees that haven’t been collected. Another item to verify is that you have withheld the proper amount for fringe benefits, like bonuses and certain life insurance policies.
2. Prepare for the first payroll of the following year
Here’s what you should prep in the time between your last payroll of 2022 and your first payroll of 2023. It’s good to do a thorough check of these items before you make the first payroll of the year, which means you may feel a bit rushed.
First, verify any updates to the federal unemployment tax rate and the wage base, as well as changes to the federal income tax withholding. Then, make sure any employees that have been terminated are no longer in the database and that they are zeroed-out for things like vacation or sick time.
It’s also a good idea to check the reasonableness of your business’s match on things like Medicare tax, Social Security tax, and state unemployment insurance tax. Additionally, ensure that any requests your employees make to their withholdings and benefits are applied.
Top Payroll Solutions to Help With Your Year-End Payroll Checklist
If all of these year-end payroll reminders are only stressing you out, there’s a simple solution: Turn to a payroll provider. A payroll provider can handle a lot of the confusing legwork for you. A payroll service can calculate and automatically file your taxes, as well as send out W-2s to all your employees, track employee time, and maintain compliance — often without you having to stay up-to-date on changes to tax laws every year. Using a payroll provider can allow you to spend more time on other aspects of your business.
Here are some of our favorite payroll providers that can make payroll a breeze rather than a time-consuming compliance headache.
Gusto offers full-service payroll and human resources (HR) services, as well as tracks employee time, files your taxes, and searches for tax credits you may not know of. You can get unlimited payroll runs, register for state taxes, pay international contractors, and send out W-2s and 1099s automatically.
Homebase gives its small business customers payroll tools, as well as tools for time tracking, HR, and hiring. Its payroll solution is best for teams that get paid hourly and fill out timesheets rather than salaried employees. The service automatically calculates your employees’ wages and taxes, as well as sends W-2s and 1099s.
Lots of small business owners know about QuickBooks for bookkeeping and accounting, but you may not realize that you can also manage your payroll using the same software. You can set up automatic payroll, as well as tax calculations and filing, and track timesheets. QuickBooks ensures accuracy — to the point that it will pay up to $25,000 for certain tax penalties. If you’re looking for an all-in-one accounting solution, QuickBooks could be a good option.
Square offers small business owners a full-service payroll option that automatically files your taxes (including quarterly taxes) and tracks employee time. You can set it up to work with your Square account, so it’s a great option if you already use Square. The software maintains compliance across state lines and handles different pay rates and bonuses for you.
Patriot Software Payroll
Patriot offers fast payroll, claiming that it takes less than three minutes to run payroll on average for its customers. You get access to unlimited payroll runs for a flat monthly fee, and can choose between two plans. With either plan, you can access an employee portal, payroll tax is calculated automatically across locations, you can send W-2s, and it integrates with Patriot’s accounting software.