Your Essential Year-End Payroll Checklist for 2025 (US Small Business)
Daniel Zvi
The end of the year brings holidays, reflections, and for small business owners, the critical task of year-end payroll processing. Getting this right is crucial for staying compliant with IRS and state regulations, avoiding costly penalties, and ensuring your employees and contractors receive accurate tax forms. Key tasks include verifying employee data, processing final paychecks, issuing W-2s and 1099s by the January 31, 2026 deadline, and filing required reports with government agencies.
Feeling overwhelmed? Don't worry. Using a comprehensive year-end payroll checklist makes the process manageable and helps ensure accuracy. This guide breaks down the essential steps for closing out your 2025 payroll year smoothly and preparing for a clean start in 2026. Whether you use payroll software or handle things more manually, following these steps is key.
✅ Step 1: Verify & Update Information (Before Final 2025 Payroll)
Accuracy is paramount. Before running your last payroll of 2025, complete these verification steps using official resources where applicable. Catching errors now prevents headaches later.
Employee Data Verification:
- Confirm Legal Names: Ensure names match Social Security cards precisely.
- Verify Current Mailing Addresses: Crucial for accurate W-2 delivery.
- Check Social Security Numbers (SSNs): Cross-reference names and SSNs to avoid IRS rejections.
- Consider using the Social Security Administration's Social Security Number Verification Service (SSNVS), accessible via their Business Services Online (BSO) portal, especially for verifying new hires.
Contractor Data Verification (for 1099s):
- Confirm Legal/Business Names.
- Verify Current Mailing Addresses.
- Confirm Taxpayer IDs (SSN or EIN): Ensure you have a valid IRS Form W-9, Request for Taxpayer Identification Number and Certification, on file for each contractor paid $600+ during 2025.
Payroll & Benefits Review:
- Review Benefit Deductions: Verify amounts for health insurance, retirement plans, HSAs, etc., against plan documents and employee choices.
- Check Retirement Contribution Limits: Ensure no over-contributions for employees or the company based on the IRS limits for 2025 (e.g., 401k, SIMPLE IRA limits).
- Verify Pay Rates & Hours: Double-check all employee pay rates (especially if raises occurred) and recorded hours.
- Review Special Payments: Ensure that bonuses, commissions, and expense reimbursements were correctly processed and taxed in accordance with IRS guidelines. (See IRS Publication 15-B for fringe benefits).
- Record Unreported Tips: (If applicable) Ensure all cash tips reported by employees are included.
Employee Withholding:
- Remind Employees About W-4s: Encourage them to review their withholdings and submit an updated IRS Form W-4, Employee's Withholding Certificate for 2026, if their personal or financial situation has changed. (Process 2025 year-end with the W-4 currently on file).
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✅ Step 2: Process Final Payroll & Year-End Adjustments
With your data verified, it's time to run the final payroll of 2025 and ensure that all income and deductions for the year are accurately recorded in accordance with IRS guidelines.
- Run Final Payroll: Process your last scheduled payroll run for the 2025 calendar year. Ensure the pay date falls within 2025 for wages to be included in 2025 W-2s (consult IRS Publication 15, (Circular E) Employer's Tax Guide regarding timing and constructive receipt).
- Include Year-End Bonuses & Commissions: Add any bonuses, commissions, or other supplemental wage payments earned and payable for 2025. Ensure correct tax withholding using methods outlined in IRS Publication 15 (Section 7, Supplemental Wages).
- Account for Taxable Fringe Benefits: Record the value of certain non-cash benefits provided during the year that must be included as taxable income. Refer to IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits for details on common benefits like:
- Personal use of a company vehicle.
- Group term life insurance over $50,000.
- Employer HSA contributions.
- Certain employee awards/gifts.
- Process Payroll Corrections: Make any final adjustments for the year (e.g., correcting errors, voiding/reissuing checks, accounting for advance repayments). Follow IRS guidelines for reporting corrections if prior tax filings were affected.
- Record Manual Checks: Ensure any checks issued outside your regular payroll system during the year are properly recorded for accurate W-2 reporting, including correct tax withholding.
- Verify PTO Balances: Calculate final PTO accruals. Payout unused time if required by your company policy or state law (check your state's Department of Labor website), or confirm correct carryover amounts.
- Confirm 2026 SUI Rate: Obtain your State Unemployment Insurance (SUI) tax rate for 2026 directly from your state's unemployment agency. You can find your state agency contact through the U.S. Department of Labor's Unemployment Insurance Service Directory.
✅ Step 3: Prepare & File Year-End Tax Forms (By Jan 31, 2026)
This step involves generating and distributing the necessary tax forms to your employees and contractors, and filing copies with the relevant government authorities. The key deadline for distributing W-2s and 1099-NECs is January 31, 2026. Always verify official deadlines on the IRS website.
- Generate Employee W-2 Forms: Create a Form W-2, Wage and Tax Statement, for each employee who worked for you during 2025. These details include their total compensation, withheld taxes, and benefit deductions.
- Ensure all data from Step 1 and Step 2 is accurately reflected.
- Distribute W-2s to Employees: Provide each employee with their Copy B, Copy C, and Copy 2 of Form W-2 by January 31, 2026. Delivery can be electronic (with employee consent) or via mail (postmarked by the deadline).
- File W-2s and W-3 with SSA: Submit Copy A of all employee W-2 forms, along with the Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration (SSA) by January 31, 2026. You can file electronically through the SSA's Business Services Online (BSO) portal (required for 10 or more forms).
- Generate Contractor 1099-NEC Forms: Create a Form 1099-NEC, Nonemployee Compensation, for each independent contractor paid $600 or more for services during 2025.
- Distribute 1099-NECs to Contractors: Provide Copy B of Form 1099-NEC to each applicable contractor by January 31, 2026.
- File 1099-NECs and 1096 with IRS: Submit Copy A of all 1099-NEC forms, along with the Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to the IRS by January 31, 2026. E-filing through the IRS FIRE or IRIS systems is encouraged and often required.
- (Potentially) File Form 940 (FUTA): Prepare and file Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, by January 31, 2026. This reports your annual FUTA tax liability. If you deposited all FUTA tax when due, you have until February 10, 2026, to file.
Note: You can find official IRS forms, instructions, and current tax deadlines for small businesses here. Deadlines falling on a weekend or holiday usually shift to the next business day.
✅ Step 4: Final Reconciliation & Record Keeping
Once all forms are filed, take these final steps to ensure your 2025 records are complete and you're ready for 2026.
- Reconcile Payroll Reports: Compare your internal payroll register totals for 2025 (wages, taxes withheld, deductions) against the totals reported on your filed forms (W-3, 940, state unemployment reports) to ensure everything matches. Investigate and document any discrepancies immediately.
- Verify Tax Payments: Confirm that all federal, state, and local payroll tax deposits made throughout 2025 match the liabilities calculated by your payroll system and reported on quarterly forms (like Form 941).
- Update Payroll System for 2026:
- Enter your new 2026 SUI rate (obtained in Step 2).
- Update any changes to state or federal minimum wage rates effective January 1, 2026.
- Input any changes to employee benefit deductions or pay rates effective at the start of the new year.
- Verify the 2026 Social Security wage base limit is correctly set in your system.
- Archive 2025 Records Securely: Gather and securely store all payroll records for 2025. The IRS generally requires you to keep employment tax records for at least four years after the date the taxes were due or paid, whichever is later. Also, check your state requirements, as they may vary. Records to keep include:
- Employee W-4s
- Contractor W-9s
- Payroll registers/summaries for each pay period
- Copies of filed W-2s, W-3s, 1099s, 1096s, 940s, 941s (or 944s), and state forms
- Proof of tax payments
- Records of benefit contributions
- Timekeeping records
- Review Your Process: Take a moment to reflect on your 2025 payroll process. Were there any recurring issues? Is your current software or method meeting your needs? Consider if any changes are needed for a smoother 2026.
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4 Step Payroll Checklist at a Glance
Simplify Your Year-End Payroll
Navigating year-end payroll requires careful attention to detail, accuracy, and meeting strict deadlines. Following this checklist step-by-step helps ensure you stay compliant, avoid penalties, and provide your employees and contractors with the correct information they need for tax season.
Feeling like this is a lot to manage manually? Modern payroll software can automate nearly every step on this checklist, from verifying data and calculating taxes to filing forms electronically and keeping secure records. Using a dedicated payroll service significantly reduces the risk of errors, saves hours of administrative work, and provides peace of mind that you're staying compliant.
We've broken down the process for you here, but the easiest way to handle year-end (and every pay run) is often with the right tool.
Ready to simplify your payroll? Check out our reviews of the Top Payroll Services for Small Businesses in 2025 to find the best fit for your company.
Frequently Asked Questions
Q. What is the absolute deadline for W-2s and 1099-NECs?
A. You must furnish W-2 forms to employees and 1099-NEC forms to applicable contractors by January 31, 2026, for the 2025 tax year. You must also file copies with the SSA (W-2s/W-3) and IRS (1099-NECs/1096) by this same date.
Q. What are the most common year-end payroll mistakes?
A. Common errors include incorrect employee/contractor names or TINs (SSN/EIN), misclassifying workers (employee vs. contractor), incorrect calculation of taxable fringe benefits, missing tax deadlines, and failing to reconcile payroll records with tax filings.
Q. How long do I need to keep payroll records?
A. The IRS generally requires you keep employment tax records for at least four years after the tax is due or paid, whichever is later. State requirements may vary, so check with your state's Department of Labor or Revenue.
Q. Do I need to report year-end bonuses differently?
A. Bonuses are considered supplemental wages. You must include them in the employee's total compensation on their W-2 and withhold taxes. You can use either the percentage method (a flat rate, currently 22% federally) or the aggregate method (combining bonus with regular wages) for withholding, as outlined by the IRS.
Q. How does payroll software help with year-end?
A. Payroll software automates most year-end tasks: calculating final paychecks with bonuses/adjustments, generating accurate W-2s/1099s, electronically filing forms (W-3, 1096, 940) with the SSA/IRS, and creating year-end reports for reconciliation. This saves significant time and reduces errors.
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