Back
Year-end payroll requires some extra time and effort from business owners looking to close out their books for the year and prepare for what’s next.
As the calendar turns toward December, businesses of every size face a critical administrative responsibility: year-end payroll. Preparing payroll correctly ensures compliance, prevents costly errors, and gives both employers and employees peace of mind heading into the new year. From bonuses and fringe benefits to year-end adjustments and preparing W-2s and 1099s, understanding your obligations can make the entire process smoother and far less stressful. Let’s break down what employers need to review, calculate, and file to properly complete year-end payroll.
Review Bonuses and Supplemental Wages
Many businesses reward employees with holiday or performance-based bonuses at the end of the year. Bonuses are considered supplemental wages, meaning they may require special tax treatment.
Key considerations for bonuses include:
- Tax Withholding: Bonuses are taxable. Employers may apply the IRS supplemental rate or combine wages for standard withholding.
- Timing: The date the bonus is paid determines the taxable year, so plan carefully.
- Documentation: Communicate clearly with employees about the bonus type—cash, check, gift card, or fringe-equivalent benefit—so expectations and reporting stay aligned.
Providing accurate bonus reporting is essential for clean and compliant year-end payroll.
Accurately Report Fringe Benefits
Fringe benefits are a major piece of the year-end payroll puzzle. These include non-cash perks and employer-provided benefits that must be properly valued and included in taxable income where applicable.
Common taxable fringe benefits include:
- Company vehicles for personal use
- Group-term life insurance over $50,000
- Employer-paid moving expenses (non-qualified)
- Taxable wellness incentives
- Gift cards of any value
Non-taxable benefits—such as certain educational assistance, small de minimis gifts, or some retirement contributions—must still be reviewed to ensure they fit IRS exclusions.
Accurate valuation and reporting of fringe benefits avoids unexpected tax liabilities for employees and prevents penalties for employers.
Perform Necessary Year-End Adjustments
Before issuing final paychecks for the year, employers should reconcile payroll records to ensure all data is accurate and complete.
Important year-end adjustments may include:
- Correcting wage or hour errors
- Updating employee name or address changes
- Ensuring proper withholding for benefits and deductions
- Reconciling federal and state payroll tax deposits
- Adjusting contributions for retirement plans, HSAs, or FSAs
This reconciliation process helps ensure that W-2s and 1099s will be accurate and that payroll tax filings match what was submitted throughout the year.
Prepare and File W-2 and 1099 Forms
Proper preparation of W-2s and 1099s is one of the most crucial steps in year-end payroll.
W-2 Preparation for Employees
Employers must prepare Form W-2 for each employee who received wages during the year. Review and verify:
- Social Security numbers
- Total wages, tips, and other compensation
- Taxes withheld
- Fringe benefit reporting
- Retirement plan indicators
W-2s must be provided to employees and filed with the Social Security Administration by January 31.
1099 Preparation for Contractors
Businesses must issue a Form 1099-NEC to any contractor paid $600 or more for services. Make sure to:
- Confirm the contractor’s TIN with a W-9
- Review total payments for the year
- Report any backup withholding (if applicable)
These forms are also due to recipients and the IRS by January 31.
Best Practices for Smooth Year-End Payroll
To make year-end processing more efficient and error-free, follow these tips:
- Begin reviewing payroll data early in Q4
- Double-check employee classifications (W-2 vs. 1099)
- Communicate deadlines and reminders to your team
- Use payroll software or consult with a payroll professional
- Audit your records before submitting final forms
Proactive planning can significantly reduce year-end stress and ensure a compliant, accurate filing cycle.
Careful Planning is the Key
Year-end payroll doesn’t have to be overwhelming. By understanding how to properly handle bonuses, fringe benefits, adjustments, and W-2/1099 preparation, employers can close out the year with confidence. Early preparation and accurate record-keeping will not only streamline your process but also help avoid costly mistakes when filing tax documents. If you need help navigating the complexities of year-end payroll, now is the perfect time to get support before deadlines approach.
Trust the Professionals at the Harding Group
Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for consultations and strive for open communication with our clients.
Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning? We have the necessary expertise and years of proven results to help.
We gladly serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time, contact us online or give us a call at (410) 573-9991 for a free consultation. Follow us on Facebook, Twitter, YouTube, and LinkedIn for more tax tips.