Year-End Payroll and Tax Tasks for Employers

In addition to tax planning, December is also the time to complete year-end payroll tasks and prepare for the new payroll year ahead. As a small business and employer, there are a few things you'll need to remember to do before you close out your payroll responsibilities for this year. From reporting income and taxes, to sending and filing forms, here are a few year-end payroll tax reminders.

Payroll Taxes

Annual payroll tax forms—W-2s and 1099-NECs—must be given to employees and to nonemployees by Jan. 31 of the year following the tax year. Jan. 31 is also the deadline for filing W-2s with the Social Security Administration or 1099-NECs to the IRS.

File W-2s with the Social Security Administration and 1099-NEC forms with the IRS. Be sure you use the correct form for the tax year, not the year you're preparing the form. Check the year on the form.

You must take backup withholding from payments made to nonemployees if you receive a backup withholding notice. The backup withholding rate is 24%. You must report backup withholding on the individual's 1099 form if you made any payments to them during the tax year.

Penalties for failing to file and failure to give W-2 forms to employees and 1099 forms to nonemployees have increased.

Social Security and Medicare Taxes

There's always an annual maximum for incomes when it comes to Social Security tax withholding. Make sure you know what it is—the IRS usually releases this info at the end of the calendar year for the next yax year—so that you know when to stop withholding the employee's part of Social Security taxes from their checks (you'll still need to pay the Social Security tax on income above that maximum).

The Medicare tax rate is 1.45% for the employer and 1.45% for the employee, for a total of 2.9%. However, after an employee reaches an annual income of $200,000, there's an additional Medicare tax of 0.9%. You must begin withholding the additional Medicare tax as soon as the employee's pay reaches that amount, even if it's mid-year. You won't have to pay the additional Medicare tax as the employer, just the regular amount.

Reminding Employees About Reviewing W-4 Forms

Employees can revise their W-4 forms at any time. The end of the calendar year is a good time to remind them to review their forms to make sure the information is still correct and the amount they want withheld for federal income tax is still accurate. Employees should also check their state's income tax withholding form for changes and withholding amounts if their state imposes an income tax.

Request W-9 Forms for 1099 Workers

You must get a W-9 form from all payees before you prepare 1099-NEC forms or other 1099 forms for non-employees. The W-9 form is similar to the W-2, and it's used to verify the individual's address and tax identification number. The tax ID number is the most important information because the IRS uses this to compare 1099 income reported by taxpayers to that on 1099s filed by payors.

Order W-2 Forms and 1099 Forms

Now is the time to order forms if you send out W-2s, the year-end tax summary for employees, or 1099-NECs, the year-end tax summary for independent contractors.

Check to make sure your payroll service has what they need to prepare these forms if you use one. You'll want to do this early in January because W-2 forms and 1099-MISC forms must be submitted to individuals by Jan. 31.

You can get W-2 forms from office supply stores or from the IRS. You can't use a W-2 form or 1099 form that you've downloaded from the internet because the red ink on Copy A is special and can't be copied.

Verify Social Security Numbers for Employees

Check with the Social Security Administration to be sure employee names and Social Security numbers match and are accurate before you prepare W-2 forms.

Verify Nonemployee Information Before Sending out 1099-NEC Forms

You must verify the tax ID number for the individual before you send a 1099-NEC form to a non-employee you've paid, such as a contractor or business. You'll have to send out a W-9 form to get the address and tax ID number.

Other Year-End Payroll Tax Tasks 

Be sure employee wages are recorded in the correct year. Using the accounting concept of constructive receipt as the date when the person has unrestricted access to the funds is what counts. Put wages into the correct year by using the paycheck date.

The income counts toward January if you're paying employee wages for the last week in December but the paycheck is dated in January. The exception is if you pre-pay wages in December for salaried employees for wages they're owed for January.

Determine how you'll deal with employee paychecks that haven't been cashed for a long time. You must make a sincere effort to find the employee. Use certified letters so you can show proof that the letter was undeliverable. You're required by state law to turn over uncashed paychecks to your state's revenue department if you can't find the employee. They'll continue to try to find the individual.

You'll also have to account for the payroll liability for the uncashed paycheck in your accounting system. The way it's handled will depend on the likelihood that the employee will eventually cash the check. Check with your tax professional to determine how to proceed.

Determine taxable amounts for employee W-2s for certain benefits, including percentages for the personal use of company vehicles and cell phones by owners and employees, and employer-paid educational expenses that might be taxable. Check with your tax professional on the reporting requirements for these benefits.

Frequently Asked Questions (FAQs)