What Should Businesses Review Before Closing Out Payroll for the Year?

As the end of the year approaches, businesses have plenty of financial responsibilities to manage. While issuing employee tax forms is an important part of the process, year-end payroll preparation involves much more than distributing W-2s. Businesses must verify that payroll records are accurate, tax payments are accounted for and reported wages align with tax filings and bookkeeping records.

Taking time to review payroll before closing out the year can help businesses identify discrepancies, avoid unnecessary corrections and prepare for tax reporting deadlines. With an organized review process, employers can enter the new year with greater confidence in their financial records.

Reconcile Annual Payroll Totals With Quarterly Tax Returns

For employers who file Form 941, Employer's Quarterly Federal Tax Return, the amounts reported throughout the year should be consistent with the annual totals reported on employee Forms W-2 and the transmittal Form W-3.

The IRS expects employers to reconcile wages, tips and other compensation, along with federal income tax withholding and applicable Social Security and Medicare wages and taxes.

Reviewing these figures can help identify discrepancies caused by data entry errors, incorrect payroll adjustments, missed transactions or differences between payroll reports and tax filings. If the totals do not match, investigate the reason before finalizing annual reporting.

Verify Employee Information

Confirm that each employee's legal name matches their Social Security records and that the Social Security number is recorded correctly. Review current mailing addresses to help ensure employees receive their tax documents promptly.

Employers should also check that all employees who require a W-2 are included in year-end reporting. If an employee changed their name or address during the year, verify that the records reflect the appropriate information for reporting and delivery.

Review Taxable Wages, Deductions and Benefits

Businesses should review taxable wages, payroll deductions and employee benefits to ensure they have been recorded and classified correctly.

Consider regular wages, bonuses, commissions, overtime and other compensation paid during the year.

Then review deductions and benefits, including retirement plan contributions, health insurance arrangements and other applicable benefits.

Certain benefits may be excluded from taxable wages, while others must be reported in full or in part. The appropriate treatment depends on the type of benefit and applicable tax rules.

Employers should also verify that Social Security and Medicare wages are accurate and that required federal income tax withholding has been recorded correctly.

Review Independent Contractor Payments and W-9 Information

Verify that each contractor’s Form W-9 contains accurate information, including their name, business name (if applicable) and taxpayer identification number, and that these details match your payment records.

Review payments made throughout the year to determine which transactions require information reporting.

Businesses should not assume that every contractor payment is reported identically. Confirm which form applies and whether the payment meets the relevant reporting requirements.

Keeping accurate vendor records throughout the year can make this process significantly easier.

Prepare W-2s, W-3s and Applicable 1099 Forms

• Form W-2 reports employee wages and applicable tax withholding.
• Form W-3 summarizes W-2 information submitted to the Social Security Administration.
• Applicable Forms 1099 report certain payments made to nonemployees and other recipients, depending on the transaction.

Before submitting these forms, compare the reported amounts with payroll registers, accounting records and previously filed tax returns. Verify that the forms include the correct recipients, taxpayer information and payment amounts.

Businesses should also confirm the applicable filing and furnishing deadlines for the tax year. For many employers, W-2 forms must be furnished to employees and filed with the Social Security Administration by January 31, subject to the applicable calendar and deadline rules.

Some 1099 forms have different deadlines depending on the form and filing method.

Check Payroll Tax Deposits and Outstanding Liabilities

Review federal payroll tax deposit records, including applicable federal income tax withholding and Social Security and Medicare taxes. Compare the amounts deposited with payroll records and filed returns to identify potential underpayments, overpayments or unrecorded transactions.

If discrepancies appear, determine whether they resulted from incorrect calculations, missed deposits or bookkeeping errors.

Unresolved payroll tax liabilities may lead to penalties or interest, so investigate outstanding balances promptly.

Reconcile Payroll Expenses With Bookkeeping Records

Wages, employer payroll taxes, employee benefit expenses and other payroll-related costs should be recorded in the appropriate accounts.

Differences may result from timing issues, payroll adjustments, incorrectly categorized expenses or transactions that were never entered into the accounting system. Correcting these discrepancies before closing the books on the year can help businesses maintain more reliable financial records.

Prepare for a Smoother Year-End With Our Accounting Services

H&H Accounting Services can help businesses organize their financial records, review accounting information and prepare for important year-end responsibilities.

Contact us at (480) 561-5805 to discuss your accounting needs and get professional support as you close out the year and prepare for the year ahead.