As the calendar year draws to a close, HR and payroll professionals face one of their most important responsibilities: year-end payroll processing. A single error—whether it’s an incorrect W-2, a missed deadline, or an overlooked tax form—can result in penalties, employee dissatisfaction, and countless hours spent on corrections. This guide provides a complete checklist to help you navigate year-end payroll with confidence and accuracy.
What Is Year-End Payroll?
Year-end payroll is the comprehensive process of finalizing all payroll activities for the calendar year, reconciling annual wage and tax data, and preparing required tax reports and forms for employees and government agencies.
What Year End Payroll Forms Need to Be Filed?
The payroll forms that need to be filed at the end of the year are:
- Form W-2 (issued to employees and filed with SSA)
- Form W-3 (transmittal accompanying W-2s)
- Form 1099-NEC (for independent contractors paid $600+)
- Form 1099-MISC (for other payments like rent or royalties)
- Form 941 (Q4 quarterly tax return)
- Form 940 (annual unemployment tax)
- Form 1095-C (for applicable large employers).
Note: Many states also require separate wage reporting forms.
When Is Payroll Year End?
Although it is called “year-end” payroll, the process spans several weeks and can depend on the size of the business. Preparation typically begins in November or early December, intensifies with final payroll runs of December, and continues through January with form preparation and distribution.
Year-End Payroll Checklist: Before Final Payroll of the Year
Proper year-end payroll preparation begins well before you process your final payroll run of the year. Taking proactive steps in the weeks leading up to year-end helps prevent errors, ensure accurate tax reporting, and reduce stressful, last-minute corrections.
Use this checklist to address key tasks before running your final payroll before year end:
Verify Employee Data
Accurate employee information is the foundation of correct tax forms.
- Social Security Numbers: Confirm every employee’s SSN is correct. Even a single transposed digit will cause W-2 rejection.
- Legal names: Names must exactly match Social Security cards. Common issues include employees who married or divorced during the year.
- Addresses: Update records for employees who moved, including those who relocated for remote work.
- State tax information: For multi-state employers, confirm which state(s) each employee is subject to for income tax withholding.
Review Payroll Records
- Wage reconciliation: Total all wages paid during the year and look for anomalies.
- Tax withholding verification: Review federal income tax, Social Security, and Medicare tax withholdings for accuracy. Confirm Social Security tax stopped after employees reached the wage base limit ($176,100 for 2025).
- Overtime and supplemental wages: Review overtime payments and verify bonuses were taxed correctly.
Confirm Benefit Deductions
- Health insurance premiums: Verify employee-paid premiums were properly deducted pre-tax or post-tax.
- Retirement plan contributions: Review all contributions and verify they didn’t exceed annual IRS limits ($23,000 for 2025, plus $7,500 catch-up).
- FSA and HSA: Verify contributions are accurate and within limits.
- Life insurance: Review employer-provided group term life insurance. Coverage over $50,000 results in taxable imputed income.
- Other fringe benefits: Identify taxable fringe benefits such as personal use of company vehicles or gym memberships.
Checklist of Payroll Year-End Processing Tasks
Successfully closing out the payroll year requires careful attention to deadlines, tax forms, and employee communications. Use this checklist to verify you’ve completed all essential tasks and avoid potential penalties or delays.
Issue Final Pay Runs
- Processing: Process your standard end-of-December payrolls with heightened attention to detail.
- Pay Date Verification: Verify pay dates and determine whether payments made in early January for December work should be reported on the current year’s W-2.
- Off-Cycle Processing: Process any approved off-cycle payments needed before year-end.
Calculate Bonuses and Accruals
- Year-end bonuses: Determine eligibility, calculate amounts, and apply proper tax withholding. Supplemental wages like bonuses can be taxed at the flat 22% federal rate or aggregated with regular wages.
- Accrued wages: Identify wages earned but not yet paid by December 31.
- PTO payouts: If your policy requires paying out unused PTO at year-end, ensure accurate calculation and processing.
Submit Tax Forms (W-2, 1099, etc.)
- W-2 preparation: Begin immediately after the final payroll. Each W-2 must accurately report total wages, federal income tax withheld, Social Security and Medicare wages and taxes, state wages and taxes, and other compensation elements.
- W-2 distribution: Provide W-2 forms to employees by January 31 via mail, hand-delivery, or electronically with proper consent.
- W-2 submission to SSA: File Copy A with the Social Security Administration by January 31st. Electronic filing is required for 10+ forms.
- W-3 preparation: This summary form accompanies W-2s to the SSA, due January 31.
- Form 1099-NEC: Issue to independent contractors paid $600+ for services. Provide copies by January 31 and file with IRS by January 31. For payments made in 2026, the threshold for issuing a Form 1099-MISC will increase from $600 to $2,000.
- Form 1099-MISC: Reports rent, royalties, prizes and other payments. Recipient copies due January 31; IRS filing February 28 (paper) or March 31 (electronic).
- State forms: Research requirements for each state where you have employees—many require separate reporting beyond federal W-2s.
Year-End Payroll Checklist: After Final Payroll of the Year
Once you’ve processed your final payroll and distributed year-end tax forms, several tasks remain to close out the year properly and prepare for the year ahead.
- Archive Payroll Reports: Federal law requires maintaining payroll records for at least three to four years. Archive all payroll registers, time records, wage rate documentation, W-4 forms, copies of filed tax forms, and benefit records. Implement appropriate security measures for both physical and electronic records.
- Prepare for Audits: Consider conducting an internal payroll audit after year end. Organize supporting documentation that shows how reported wages were calculated, documentation of non-taxable benefits, records of employer-paid taxes, and proof of timely tax deposits. Address any discovered errors proactively by consulting with tax advisors about corrective action.
Communicate with Employees
- W-2 distribution announcement: Notify employees when W-2s will be available and how they’ll be distributed.
- Review instructions: Encourage employees to review W-2s carefully and compare against final pay stubs.
- Taxable fringe benefits explanation: Proactively explain any additions for fringe benefits that increase W-2 wages beyond actual paychecks.
- Contact information: Provide clear contact information for W-2 questions.
Key Deadlines for Year-End Payroll Submission
Staying on top of year-end deadlines is essential for smooth payroll processing and compliance. Here are the key dates you need to know to keep everything running on schedule.
- January 31: W-2 distribution to employees, W-2 filing with SSA (with Form W-3), 1099-NEC distribution and filing, Form 941 (Q4) filing, and Form 940 filing all due January 31.
- February 28/March 31: Other 1099 forms filed by February 28 (paper) or March 31 (electronic).
- February 28/March 31: Form 1095-C employee copies due early March; IRS filing February 28 (paper) or March 31 (electronic).
- State-specific deadlines: Research requirements for every state where you have employees. Many have different due dates.
Possible Penalties: IRS penalties for late W-2 filing: $60 per form (1–30 days late), $120 per form (31 days–August 1), $310 per form (after August 1 or not filed).
End-of-Year Payroll Reports You Need
Year-end is the ideal time to review your payroll data and uncover trends that might otherwise go unnoticed. These reports provide the insights you need to make informed decisions about staffing and budget planning.
- Annual Payroll Summary Report: Summarizes all payroll activity including total gross wages, breakdown by compensation type, taxes withheld, and total net pay. Use for budget variance analysis and planning.
- Department or Cost Center Report: Breaks down payroll expenses by organizational unit. Identify high labor costs, excessive overtime by department, and inform budget allocation.
- Tax Liability and Deposit Report: Reconciles all payroll taxes withheld and paid throughout the year. Identify discrepancies between taxes withheld and deposited, confirm timely deposits, and ensure year-end forms match deposit records.
- Benefits Cost Report: Summarizes benefit-related costs including employer contributions to health insurance and retirement, employee contributions, and per-employee averages. Assess benefit cost trends and sustainability.
Common Mistakes to Avoid During Payroll Year End
Year-end payroll processing involves multiple steps and tight deadlines, making it easy for errors to slip through. The good news is that most mistakes are preventable with proper planning and attention to detail. Here are a few of the most common year-end payroll mistakes, including how to avoid them:
Missing Deadlines
The most costly mistake is missing the January 31 deadline.
How to Avoid it: Create a detailed timeline working backward from January 31, and build buffer time, setting internal deadlines several days early, and processing forms as soon as final payroll is complete.
Employee Classification
Another common mistake is misclassifying workers as independent contractors vs. employees or exempt vs. non-exempt creates reporting problems and compliance risks.
How to Avoid it: Review worker classification annually, and use IRS guidelines for independent contractor classification, applying DOL salary basis and duties tests carefully. When you’re unsure what to do, consult with employment counsel.
Taxable Fringe Benefits
It’s also fairly common to overlook taxable fringe benefits, such as group term life insurance over $50,000, personal use of company vehicles, moving expense reimbursements, gym memberships, educational assistance over $5,250, and awards or prizes.
How to Avoid it: Conduct a comprehensive fringe benefit review, create a checklist of all non-cash benefits, implement systems to track personal use of company assets, and consult IRS Publication 15-B.
How Paycor Helps with Year-End Payroll
Paycor’s comprehensive payroll software streamlines every aspect of year end, from preparation through final filing. Here’s how:
- Automated processing calculates W-2 amounts, verifies Social Security numbers, applies correct tax calculations, and generates required forms.
- Compliance expertise helps ensure forms reflect current-year requirements and regulations.
- Seamless data flow eliminates time-consuming data gathering since all information is already validated through ongoing payroll
- Electronic filing and distribution support direct filing to SSA and IRS, meeting electronic requirements. Employees who want paperless forms can access W-2s through self-service portals.
- Multi-state capability handles varying state requirements and different filing deadlines. Customer support provides assistance from payroll professionals who understand year-end complexities.
Ready to simplify your year-end payroll? Visit our Year-End Resource Center to access planning resources and see how Paycor can transform your year-end processing from overwhelming to effortless.
FAQs About Year-End Payroll
Still have questions about what to do with payroll at year end? Keep reading!
Why is year-end payroll important?
Year-end payroll is important because employees depend on timely, correct W-2 forms to file their own personal tax returns. The IRS, Social Security Administration, and other state agencies use submitted data to verify tax compliance.
Non-compliance—or errors in payroll processing—can trigger IRS audits, state tax investigations, and penalties that can damage your organization’s finances and reputation
What is the difference between payroll year end and payroll fiscal year?
Payroll year end always follows the calendar year (January 1–December 31) because tax reporting requirements are based on the calendar year, regardless of when a company’s fiscal year ends. A company with a June 30 fiscal year end still must complete payroll year-end following the calendar year and meet the same January 31 W-2 deadline.
When is the deadline for year-end payroll submission?
The primary deadline is January 31, when employers must provide W-2 forms to employees, file W-2s with the Social Security Administration, provide and file Form 1099-NEC, and file Forms 941 (Q4) and 940.
Note: Other 1099 forms have later IRS filing deadlines—February 28 (paper) or March 31 (electronic). State deadlines may differ.