Payroll year end checklist | End-of-Year Checklist for Business Owners

Payroll Year-End Checklist

Use this tool to plan and organize all aspects of your year-end processing and obligations.

Year end has two phases:

See also the related reference item called Year-End Balancing

BEFORE your LAST PAYROLL of the calendar year

In addition to your normal verification procedures, do the following:

1. Check employee and employer indicative data:

  • Verify the employer and employee data that is used in processing your quarterly tax reports and W-2s. For ADP clients, the "Quarterly Tax Verification Letter" is the document which displays this critical data.
  • To which employees does the "retirement plan" indicator in Box 13 of Form W-2 apply?
  • Confirm that employee names and Social Security numbers are in the correct format.
  • The IRS may impose a penalty for each Form W-2 with a missing or incorrect Social Security number or employee name.
  • Ensure that deceased employees are properly coded.

2. Check wage, tax and benefits data:

  • Confirm that deferred compensation plan type is correct and verify employee contribution amounts.
  • Check that Group-Term Life Insurance adjustments have been updated and submitted.
  • Ensure that other special tax items have been updated and submitted, such as Other Compensation, Third-Party Sick Pay, Employee Business Expense Reimbursements, Taxable Fringe Benefits, Tip Allocation information, and Dependent Care Benefits.
  • Verify the employer state unemployment insurance tax rate and taxable wage limit for each state.
  • Compute uncollected Social Security and Medicare taxes for retirees and former employees.
  • Verify that withholding has been made properly, or withhold from the final paycheck for taxable fringe benefits. These may include:
  • Group-term life insurance in excess of $50,000
  • Third-party sick pay (is the third party issuing a W-2?)
  • Personal use of company vehicle
  • Non-qualified moving expense reimbursements
  • Company-provided transportation or parking
  • Employer-paid education not related to the employee's job
  • Non-accountable business expense reimbursements or allowances
  • Bonuses
  • Non-cash payments
  • Check for required backup withholding; verify amounts.

3. Check for special procedures:

  • Schedule any special bonus payrolls for the current year.
  • Request any special reports needed for year end.
  • Ensure adequate payroll supplies to complete the year and to begin the new year, including blank checks, payroll forms and blank Forms W-2.
  • Determine whether all adjustments are applied or that an adjustment payroll has been scheduled.
  • Remind employees to fill out a new Form W-4 if their situation has changed.
  • Obtain new Forms W-5 for Advance Earned Income Credit (EIC) for the new year.
  • Confirm that all "manual" checks written during the year have been accounted for and updated in the system.
  • Determine that all voided or reversed paychecks have been accounted for in the system.

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AFTER your LAST PAYROLL, but BEFORE the FIRST PAYROLL of the NEW calendar year

Do the following:

1. Check employee and employer indicative data:

  • Review discrepancies such as missing addresses, and missing or invalid Social Security numbers.
  • Check the "purge" coding of any terminated employees who should be removed from the database.
  • Ensure that terminated employees have zero balances for loans, garnishments, vacation, and sick time. These discrepancies were uncovered while preparing for the last payroll of the calendar year and should be corrected or adjusted.

2. Check wage, tax and benefits data:

  • Determine whether Earned Income Credit (EIC) coding has been submitted properly.
  • Review discrepancies such as --- negative quarter and/or year-to-date fields, and qualified pension coding discrepancies.
  • Verify the employer's new state unemployment insurance tax rate and taxable wage limit for each state where the employer has workers.
  • Verify new state disability insurance rate and taxable wage limit, where applicable.
  • Test reasonableness of Social Security tax withholding (multiply total wages less excess wages by 6.2%).
  • Verify the reasonableness of employer's matching Social Security tax.
  • Test reasonableness of Medicare withholding (multiply total wages by 1.45%).
  • Double-check the reasonableness of employer's matching Medicare tax.
  • Test the reasonableness of state unemployment insurance tax (verify taxable wages and multiply by the employer experience rate).
  • Compare payroll register totals to Form W-3 totals.
  • Compare Forms W-2 to State and local report totals.
  • Compare total wages reported for each tax; reconcile any differences.
  • Does reported taxes from Form W-3 equal tax deposits (total of Forms 941)?
  • Check contributions to and distributions from Section 125 (cafeteria) plan for child care and for medical care reimbursements.
  • Check for excess contributions to qualified plans, including 401(k), 403(b) and SIMPLE plans, especially for highly-compensated employees.
  • Check for required tip allocations for tipped employees.
  • Ensure that any employee tax and/or taxable blocks have been removed, if not desired for the new year.
  • Verify that employee requests for fringe benefit deduction changes for the new year have been applied.
  • Confirm the settings and clearing of special accumulators for the new year.

3. Check for special procedures:

  • Schedule any special bonus payrolls.
  • Verify that the new year month-end close-out dates are accurate.
  • Verify that management reports for the new year are scheduled, and will include the correct weeks and process.
  • Confirm that for the new year the schedule of pay dates, period ending dates and quarter closing dates, are as intended and do not fall on holidays or weekends.

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