With a new year on the horizon, there are a number of essential tasks your business must complete to seamlessly transition between the fourth quarter of the calendar year and the first quarter of next year. One major demand is year-end payroll management, which can include everything from updating compensation and benefits to preparing for new local, state, or federal regulations that take effect in January.
In this article, we’ll outline the key steps to ensuring your year-end payroll management is organized, legally compliant, and situated to support your business in the new year and beyond.
Core Tasks & Deadlines
The central purpose of a year-end payroll review is to check the accuracy of your business and employee tax information between the fourth quarter of the current year and the first quarter of the subsequent year. This includes all of the following processes:
- Determining any new local, state, or federal regulations that will apply to your business in the first quarter of the new year
- Preparing and filing all IRS, SSA, and state or local tax forms (everything from standard W-2 forms to 1095-B forms for self-insured small businesses)
- Thoroughly reviewing tax documents to guarantee accurate payment tracking in the new year
- Calculating employee compensation, deductions to be withheld, and tax liabilities
In terms of deadlines that apply to most businesses, W-2, W-3, and 1099-NEC forms as well as Forms 940, 941, and 944 are all due by January 31st. Fourth quarter FUTA taxes must also be deposited by this deadline. Annual business tax return deadlines are dependent on your business structure. Multi-member LLCs, S-corporations, and partnerships must file by March 15th, while C-corporations have until April 17th.
Here are the essential steps to prepare your business up to the final payroll period of the current year. In a later section, we’ll describe the necessary final steps you’ll need to complete once your last payroll period has been calculated.
Confirm Business and Employee Information
To avoid processing delays, reprints of tax forms, or IRS penalties, it’s important to verify your company name, address, employer identification number (EIN), and state unemployment account numbers. Similarly, you should request that all employees verify their name, address, contact information, and SSN, particularly so tax documents arrive at the correct addresses and keep your year-end payroll and tax processes efficient. If there are any special circumstances with any of your existing employees (uncompleted tax forms, active payroll disputes, or otherwise), ensure that these are resolved before the close of the calendar year.
Notify Your Employees of Any Unused Benefits
When you request employee information verification, be sure to simultaneously notify your employees of any unused benefits that are set to expire by the end of the calendar year. Your notifications and recommendations should align with company policy and any applicable laws, including state or local ones. Be sure to communicate any necessary information to employees regarding days that can be carried over (including limits) so your employees can schedule vacation, personal leave, or sick days while they’re still eligible.
Also, remember to remind employees of any remaining balances in flexible spending accounts (FSA) used for dependent care or medical costs. Although any remaining amounts are typically forfeited at the end of each year, some employees can submit claims for expenses from the previous year (with a 75-day “grace period” or a carryover amount of up to $570, under certain circumstances). Review and accurately communicate the terms of your plans so employees are aware of their options.
Prepare for Year-End Bonuses
If you’re considering providing year-end bonuses to your employees, remember that these are often tax-deductible. For cash-basis businesses, a pay bonus given in 2022 would be deductible in 2022, whereas for accrual-basis businesses, bonuses declared before the end of the year in 2022 could be paid upwards of 75 days after the close of the year (as late as mid-March 2023). Bonus deduction terms for S- and C- corporations are distinct from cash- and accrual-based businesses. C-corporations, in particular, have a set of terms that should be thoughtfully reviewed before offering bonuses.
Establish Compensation for New Year
With the wage base of the Social Security portion of FICA set to rise to $160,200 in 2023, many employers will be paying more in FICA taxes (6.2% share). Additionally, new local and state regulations could impact minimum wage standards for non-exempt employees beginning in 2023. Regulatory changes may also affect salary thresholds for your currently exempt employees – one of many reasons to partner with experts in labor law compliance to remain up-to-date on all forthcoming changes.
Ultimately, the compensation you offer each employee will depend on what is financially viable once accounting for payroll taxes and other costs.
Evaluate Processed Paychecks & Secure Necessary Tax Forms
Before you finalize annual payroll and tax data from the final pay period, you should verify all information that has already been processed, including benefits deductions, child support deductions, disability/benefits payments, special tax exemptions, employee wages, and – if applicable – deferred employer Social Security taxes if your business benefited from the CARES Act relief measure.
Additionally, your business should request all necessary tax forms (W-2s, W-3s, and more) from your payroll provider to ensure prompt delivery of end-of-year tax statements to employees.
After your final payroll period has been calculated, there are still some important steps left to complete for tax filing and preparation for the new year. This includes all of the following and more:
- Conduct a final review and verification of annual employee wages, benefits earned, taxes paid, and fringe benefits (from sick days to tuition reimbursement benefits).
- Distribute W-2s and other relevant tax forms to employees no later than January 31st of the following year. Ideally, this process should be handled by your payroll provider.
- Submit all year-end payroll tax forms and necessary deposits. You can complete this process through the IRS business tax website. Keep in mind the deadlines we explored earlier based on your business structure.
- Consider any necessary (overdue) changes to your payroll policy, including an honest assessment of your level of satisfaction with your current payroll provider. Determine whether the platform is employee-friendly, intuitive, integrated with other HR & HCM functions and whether customer support is provided at the level you need for your business and employees.
Optimize Year-End Payroll with CAVU HCM
Organizing all of the employer and employee information you need to efficiently handle year-end payroll can be a dizzying process. That’s why it’s so beneficial to have a CAVU Payroll Guide available to support you through each phase of year-end payroll. In addition to year-end payroll services, we can leverage our expertise and HCM tools to help you integrate payroll with HR management, talent management, workforce management, and whatever else you need to keep your business optimized and your employees engaged and satisfied.
Ready to enjoy a stress-free payroll process and start the new year with a clear plan for success? Contact us today to start our collaboration.