In addition to getting tax forms, such as W2s, ready for the Internal Revenue Service, December also happens to be the time you need be going through your end-of-year checklist for payroll tasks so you can be ready for the upcoming year. If you're a small business in Chicago, you must keep several things in mind as you complete your year-end payroll checklist. The right tax professional can help you with your year-end checklist. Processing payroll is an ongoing task at any time of year, but the end of the calendar year does roll right into tax season.
What To Do Before the Last Payroll of the Calendar Yea
Part of your payroll year-end checklist should be making sure that all of your payroll information is up to date, including employee earnings and taxes withheld.
1. Think of Payroll Forms To Be Submitted
You should give your employees access to the 1099 or form W2 by the end of January so they can record their employee wages for federal income taxes and other tax filings. You'll also need to submit certain information to the IRS and Social Security Administration. The following are payroll forms you need to finish and submit at the end of the year.
- W2 Form: This reports IRS withholdings and wages.
- W3 Form: This summarizes W2 information and goes to the SSA with employee W2s.
- 1099-NEC: This is an income statement for contractors and must be reported by businesses with wages of more than $600 to nonemployees and more than $10 for any royalty payments. The 1099-MISC is used for nonemployee income that happened prior to 2020.
- Form 1096: Any contractors paid and provided a 1099 MISC will have their payment information summarized and submitted to the IRS using this form.
- Form 940: Use this form to pay any Federal Unemployment Tax Act liabilities to the government. This is also known as FUTA.
- Form 941: This quarterly form reports employee payroll taxes due for collection, including income, Social Security, and Medicare taxes.
- Form 944: If you have payroll taxes under $1,000 per year, you might qualify for annual tax payments rather than quarterly.
- Form 1095-B: If your small business offers health insurance, then you need to send out this form to employees and the IRS to document their health coverage.
Deadlines of Payroll Forms
Payroll software might simplify the tasks you have to do with federal income tax most of the time, but end-of-the-year tax forms for the Internal Revenue Service may have specific deadlines. Keep all records updated all year long so the tax season is easier on your small business. Even if you use outsourced payroll services, it's still on you to verify the information and specific deadlines you can't afford to miss. Fortunately, you don't have to submit all your annual payroll forms simultaneously. These are many of the filing and reporting dates for year-end payroll that you need to know.
2. Analyze Payroll Reports
Your payroll year-end process needs to start before the last payroll of the year much more than before the first payroll of the new year's payroll schedule. Getting payroll forms right isn't just for your small business but also vital to your employees, but there are reports more for your business than anyone else.
- Employee Summary Reports: This can be a comprehensive look into the tax withholdings, deductions, and wages for every independent contractor or employee you paid.
- Payroll Summary Report: Run this report in a date range of January 1 until December 31. That will summarize details that include net and gross wages, tax withholdings, and deductions, among various general information.
- PTO Report: Run this to prevent staffing mishaps since you can review all PTO paid out as well as the remaining hours for each employee.
- Retirement Contributions: When you pull up all the employee and employer contributions to various retirement accounts, you and your team can see what changes might be appropriate for the coming year.
- Workers' Compensation Report: If you paid out workers' comp during the year, then your insurance provider might need this report's information in order to evaluate your new premiums.
3. Verify Your Small Business Information
You need to be sure that every piece of information about your employees and company is correct. Knowing exactly who you're paying is fundamental to great payroll practices. Verify your company's name, tax data, and IDs are accurate and updated. This is the best time of year to verify all of this, but you can do it at any time. While you're at it, verify your EIN at both federal and state levels, along with your business name, address, and state unemployment account number.
4. Confirm the Identifying Information of Employees
You also need to be sure that employee information is current. For them, check for correctly spelled names, accurate Social Security numbers, up-to-date addresses, and jurisdictions where they work or live. Any discrepancies between recorded information and what's actually accurate should be corrected and updated. Inform your payroll service professionals of changes so you don't incur penalties thanks to errors. Make sure W9 forms are updated correctly for contractors getting 1099 forms.
5. Set the Annual Bonuses
Is your small business one that offers yearly bonuses to employees? They might be tax-deductible, but how would you deduct them? And when? If you report income and expenses on a yearly basis by the calendar, then you might use a cash basis or an accrual basis. On a cash basis, you deduct bonuses for the year they get paid in. For an accrual basis, your bonuses are deductible for around the first 10 weeks after the year is over, although there are different rules for shareholder-employees in S corps and owner-employees in C corps.
6. Set Next Year's Compensation
When you get ready for the next year, you might want to start factoring in pay raises you to expect to give your staff. How much you will offer depends on what you're able to afford once you factor in payroll taxes and the expenses involved with the compensation of your staff in the first place. Remember that the wage base for FICA's Social Security portion is at least $147,000, and a 6.2% share gets applied to higher wages. Non-exempt workers should see minimum wage rate increases for localities or states where they currently operate.
7. Advise Your Employees About Unused Benefits
PTO stands for paid time off. Do your employees get a lump sum when the year starts? Or do they accrue it as the year goes on? What happens to unused time if there's a January reset? Also consider flexible spending accounts for dependent care and medical costs, as these usually have the feature of using or losing them. Amounts left over at the end of a year might be subject to forfeit, so you need to make sure your employees know where they stand on both of these benefits.
8. Record All Paychecks That Have Been Processed
You can't totally finalize annual tax and payroll numbers until the final pay period is passed, but you can get ahead on recording and then verifying everything already processed. Review the previous pay periods to verify the accuracy of amounts including employee wages, benefits deductions, child support, miscellaneous deductions, disability, benefits payments, and special tax exemptions. Also, verify any deferred amounts of Social Security taxes that might have happened due to pandemic legislation. The IRS is tracking all of this closely, so make sure you get everything as accurate as possible to avoid future trouble.
9. Order the Applicable Tax Forms
You might need to order paper forms from the IRS. W2 forms are tax and wage statements for employees, whereas contractors get 1099 forms. You can file such forms through the IRS website if you don't want to go the paper route. The paper forms usually take around two weeks to email, so order these in December in advance. Blank forms require manual completion, and that takes time. Health insurance data and information might be reported via various 1095 forms. Serious penalties await businesses that don't provide these in an accurate and timely fashion.
10. Check for Unique Situations
There are certain circumstances that might not apply to every business each year, but you should keep an eye out for them. Pay attention if your business has new employee hires who don't finish their W4 on time, employees who have reversed or voided paychecks, current or former employees that have active payroll disputes, and other lingering situations that might not be resolved by the time the year ends. If you can't get closure on these by the end of the year, then verify how cush issues are going to impact the payroll at that time.
What You Need To Do Between Your Last Payroll of One Year and Before the First Payroll of the Next Year
Some year-end payroll tasks will happen after the final payroll of one year but before the normal payroll starts for the next tax year. make sure you do all these to finish your year-end payroll checklist.
Give Every Employee Their W2 Forms
Once the last pay period of the year is over and you've looked over the payroll calculations for each employee, print and then hand out their W2 forms. Some payroll providers will directly send these to employees. No matter how they are delivered, employees are supposed to get a copy or have download access to theirs by the end of January of the next calendar year. Given this, it's crucial that you calculate these forms so you can distribute them promptly.
File IRS Tax Forms and Deposit Any Taxes You Owe
Your business tax obligations are going to vary based on several factors, including your state, your industry, and the size of your business. However, you can reasonably expect requirements for certain things you need to file, including a yearly business tax return, W2 and W3 forms for every employee, form 940 for FUTA, quarterly form 941s or the annual form 944, and the taxes themselves that need to be paid. While personal income taxes are often due on April 15, business returns and taxes are often due a month earlier by March 15.
Review Updated Regulations and New Rules
Minimum wage increases are always something to watch out for in different states. Even local counties and cities might have their own minimum wage rates for the upcoming year. In many cases, wage increases go into effect on January 1 of the new year. Account for this when you determine appropriate compensation for your employees and contractors.
Review the Reporting Schedule for the Coming Year
Once you get this year's payroll wrapped up, start reviewing the payroll schedule for the coming fiscal year. You need to check all the different period-ending and quarterly closing dates. Be sure they aren't falling on weekends, major holidays, or other dates that might impede timely processing. Make the proper adjustments to your company schedule before setting up your payroll plan in the new year.
Having the right payroll system in place helps you manage regular payroll all year long, but the wage and tax statements you have to put together as part of your year-end payroll responsibilities can involve more work than usual. We offer professional payroll services for small businesses in the Chicago area and across the nation. Find out what we can do for you by contacting us right away.