For business owners who run payroll, the end of the year isn’t just a calendar milestone — it’s a series of deadlines with real consequences if missed. Penalties, incorrect W-2s, ACA reporting failures, and retirement contribution shortfalls are all avoidable with the right preparation. Here’s what needs your attention before December 31.
Verify Employee Information
Before running your last payroll of the year, confirm that employee records are current and accurate. W-2 forms generated with incorrect Social Security numbers or addresses create filing headaches and potential IRS penalty exposure.
Confirm: legal names match Social Security card formats, SSNs are correct and verified, current mailing addresses are on file, and exempt status elections (W-4) reflect each employee’s actual situation. If any employee had a life event — marriage, divorce, new dependent — in the past year, their withholding may need updating. Now is the time to reconcile, not in January.
Reconcile Payroll Tax Deposits
Your payroll tax deposits throughout the year must match what you report on your quarterly 941 forms and, ultimately, your W-2 and W-3. Year-end is the time to confirm this reconciliation is clean.
Compare: total wages paid, federal income tax withheld, Social Security and Medicare taxes (both employee and employer portions), and any state withholding. If there are discrepancies between what was deposited and what the returns show, resolve them before filing the year-end forms. Reconciliation errors that carry into W-2 season become much harder and more expensive to unwind.
Process Fringe Benefits and Taxable Non-Cash Compensation
Many taxable fringe benefits must be included in employees’ W-2 income and reported before year-end. These are commonly missed and commonly flagged in audits.
Taxable fringe benefits to address include: personal use of a company vehicle (the value of personal miles must be included in Box 1 wages and withheld for FICA), group-term life insurance coverage exceeding $50,000 (the cost of coverage above that threshold is taxable), and any other non-cash compensation that wasn’t run through regular payroll during the year.
For S-Corp shareholders who received employer-paid health insurance premiums, those premiums must be included in the shareholder’s W-2 wages (Box 1) — though they’re not subject to FICA. This also enables the shareholder to take the self-employed health insurance deduction on their personal return.
Max Out Retirement Plan Contributions
December 31 is the deadline for salary deferrals to most employer-sponsored retirement plans. 401(k) elective deferrals must be withheld from a paycheck dated in the calendar year — you cannot make 2026 elective deferrals in January 2027.
Confirm that any employee who wants to maximize their 401(k) contribution has submitted the correct deferral election, and that your payroll system will process it by year-end. For 2026, the 401(k) deferral limit is $23,500 (plus $7,500 catch-up for those 50 and older — verify current limits as these adjust annually).
Employer contributions (match, profit sharing) generally have until the business tax return due date, including extensions, to be funded. But elective deferrals have no such grace period.
Handle Year-End Bonuses Correctly
If you’re paying year-end bonuses, verify the timing and tax treatment. A bonus is taxable in the year it’s received by the employee, not the year the employer accrues it — unless you’re a C-Corp using accrual accounting and the bonus is paid within 2.5 months after year-end. For cash-basis businesses and S-Corps, the bonus must be paid by December 31 to be deductible in the current year.
Withhold federal and state income tax at either the flat supplemental rate (22% federal for amounts under $1 million) or by aggregating the bonus with regular wages and using the standard withholding tables. Bonuses are subject to FICA just like regular wages.
Review ACA Reporting Obligations
If you’re an Applicable Large Employer (generally 50 or more full-time equivalent employees), you’re required to file Forms 1094-C and 1095-C. These forms report whether you offered minimum essential coverage, what coverage was offered, and employee enrollment.
The 1095-C forms must be furnished to employees and the 1094-C package filed with the IRS. Deadlines typically fall in January/February for employee copies and March for IRS filing (verify current deadlines — they shift based on weekend/holiday calendars). Year-end is the time to collect the data — not to start from scratch in February.
Frequently Asked Questions
Q: When must W-2s be distributed to employees?
A: W-2s must be furnished to employees by January 31 following the calendar year. They must also be filed with the Social Security Administration by January 31. Missing this deadline triggers penalties that increase the longer you wait.
Q: What if I made payroll errors during the year?
A: Correct payroll errors as soon as possible. If you over-withheld or under-withheld taxes, the correction mechanics depend on the type of error and which quarter it occurred in. Your payroll provider should be able to run corrected reports. Some errors require filing Form 941-X.
Q: Do I need to issue 1099s to contractors at year-end?
A: Yes, if you paid an unincorporated contractor $600 or more during the year for services, you must issue Form 1099-NEC by January 31. If you haven’t been tracking these payments throughout the year, now is the time to pull the numbers before January scrambles your bandwidth.
Q: Can I switch payroll systems at year-end?
A: You can, but timing matters. A mid-year switch is generally cleaner. A December or January switch requires careful reconciliation to ensure wage totals, tax deposits, and year-end filings line up correctly. If you’re switching, coordinate the transition with your new provider to ensure W-2 data is captured completely.
A clean year-end payroll process prevents most of the costly corrections and penalty notices that arrive in the spring. The work happens in November and December — the penalties arrive in April.
If you’d like to apply this to your situation, the team at Molen & Associates is here to help. Schedule a consultation at molentax.com.
