Year-end payroll is crunch time. Miss a deadline and you face IRS penalties. Here are the 15 essential steps to close out your payroll year correctly.
By ExpertPaystubs Editorial Team. Published 2026-03-22
The end of the payroll year is the most error-prone period for businesses. Between W-2 deadlines, benefit enrollment changes, and tax table updates, there's a lot that can go wrong. This checklist keeps you compliant and organized.
November Tasks
1. Verify Employee Information
- Confirm names, addresses, and SSNs for all employees
- Send employees a verification request (many companies use a "W-2 accuracy" memo)
- Update any address changes before year-end processing
2. Review Benefits Enrollment
- Process open enrollment changes effective January 1
- Update pre-tax deduction amounts for new premiums
- Adjust FSA/HSA contribution elections
3. Check Wage Thresholds
- Social Security wage base: $184,500 — verify high earners' withholding stopped correctly
- Additional Medicare Tax: $200,000 — verify 0.9% surcharge kicked in
- 401(k) contribution limit: $23,500 — ensure no over-contributions
December Tasks
4. Process Final Payroll Carefully
- Determine which paychecks fall in 2026 vs. 2027 (based on pay DATE, not period)
- Include all year-end bonuses, commissions, and adjustments
- Process any final expense reimbursements
5. Reconcile YTD Totals
- Compare each employee's YTD gross with sum of individual pay periods
- Verify YTD federal, state, and FICA tax totals
- Reconcile pre-tax deduction YTDs against benefit provider records
6. Calculate Final Tax Deposits
- Determine your deposit schedule (monthly or semi-weekly)
- Make the final Q4 federal tax deposit on time
- File state tax deposits per your state's schedule
7. Prepare for W-2s
- Order W-2 forms (or confirm electronic filing capability)
- Verify Box 1 calculations: Gross wages minus pre-tax deductions minus Section 125 cafeteria plan contributions
- Confirm Box 12 codes are correct (DD for health coverage cost, W for HSA, D/E for 401k)
8. Process Fringe Benefits
- Calculate imputed income for group life insurance over $50,000
- Account for personal use of company vehicles
- Include any other taxable fringe benefits in final wages
9. Handle Third-Party Sick Pay
- Coordinate with disability insurance carriers
- Ensure proper tax withholding on third-party payments
- Include in W-2 reporting (Box 13)
January Tasks (Deadlines!)
10. File W-2s — Due January 31
- To employees: Paper or electronic by January 31
- To SSA: Electronic filing by January 31 (ssa.gov/employer)
- Penalty: $50-$290 per form for late filing
11. File 1099-NECs — Due January 31
- Issue to independent contractors paid $600+
- File with IRS by January 31
12. File Form 941 (Q4) — Due January 31
- Report Q4 federal tax withholdings and FICA taxes
- Reconcile with actual deposits made
13. File Form 940 (FUTA) — Due January 31
- Annual federal unemployment tax return
- Report total FUTA tax liability and payments
14. Update Tax Tables for New Year
- Download 2027 IRS Publication 15-T
- Update state withholding tables
- Adjust Social Security wage base for 2027
15. Archive Payroll Records
- Store 2026 payroll records securely for minimum 4 years
- Back up digital payroll data
- Organize by quarter for easy audit access
Penalty Reference
| Violation | Penalty |
|---|---|
| Late W-2 filing (≤30 days) | $50/form |
| Late W-2 filing (31 days - Aug 1) | $120/form |
| Late W-2 filing (after Aug 1) | $290/form |
| Intentional disregard | $580/form |
| Late Form 941 (federal tax deposit) | 2-15% of unpaid tax |
| Failure to furnish W-2 to employee | $290/form |