As the end of the year rolls around and you prepare for 2022, it’s critical that you stay up to date on all applicable laws and regulations. From tax filing, taxability, to finalizing 2021 payroll activities and setting compensation/benefits for next year, there is a lot to consider when closing out the year.
Even if you are experienced with year-end payroll, it can be easy to overlook important steps, and this can leave you scrambling at the last minute to make sense of a mess. Using an organized year-end payroll checklist can help make sure you don’t overlook any major requirements from a payroll or benefits perspective.
To help your business stay up to date, our financial experts here at MCDA CCG have constructed this simple guide to walk you through year end payroll responsibilities. Keep reading for our 2021 Year- End Compliance Checklist!
How to Prepare Before the Last Payroll of the Year
In order to ensure accuracy and proper information in your year-end payroll taxes, it’s important that you prepare well before the end of the year. If you are wondering how you can best prepare for year-end payroll, look no further than this guide. Here is a closer look at the steps you can take.
Verify Business Information
You should regularly ensure that the information you have for tax reasons is up to date and accurate. With that being said, now is the time to verify that each detail is correct.
- State and Federal Employer Identification Number (EIN)
- Company Name
- Company Address
You will also need to do the same with your state unemployment account numbers.
2. Set Next Years Payment
While you prepare the company’s budget for 2022, it’s good practice to factor in any precedented pay raises for your employees. Clearly, the dollar amount depends on what you can afford once you have included cost of compensation and all payroll taxes.
3. Remind Employees about Unused Benefits
Depending on your policy, some of the benefits that employees earned or paid for in 2021 may expire at the end of the year, so it is your responsibility to advise your employees accordingly:
- Are unused days (vacation, sick, personal, etc.) carried over? (check your current company handbook)
- If so, are there limits to how much can be carried over?
Flexible spending accounts (FSAs) for medical costs and dependent care: Usually, FSAs have a use-it-or-lose-it feature. Generally, amounts remaining in the account at the end of the year are forfeited. However, plans may allow employees to submit claims within a set time (run out period) for expenses incurred in the previous year.
4. Confirm Employees’ Information
The end of the year is a great time to make sure all employee information is up to date and accurate. Failure to ensure accuracies can lead to costly delays, W-2 reprints, and substantial IRS penalties.
Ask all employees to verify their first and last name, Social Security number, address, and additional contact information to help streamline your end-of-year processes while delivering vital tax documents to the correct location. This is also the time to ensure that deceased employees are properly coded and abide by any state laws regarding final pay for deceased employees.
5. Record All Processed Paychecks
While you won’t be able to finalize your annual payroll and tax numbers until after the final pay period, you can certainly get a jump start on recording and verifying everything that has already been processed. Review previous pay periods to ensure that all amounts are logged accurately by verifying:
- Employee wage amounts
- Benefits deductions
- Child support or other miscellaneous deductions
- Disability or other benefits payments
- Special tax exemptions that may have occurred throughout the calendar year
6. Order Applicable Tax Forms
At a minimum, you will need to provide your employees with end-of-year Form W-2. You can get these necessary tax forms directly from your payroll service provider, printed from your payroll management system, or directly from the IRS website.
Your business may also be subject to health coverage reporting requirements as part of the Affordable Care Act. If you have more than 50 employees or your business is self-insured, you must file Form 1095 with the IRS to verify that you offered health coverage. Self-insured small businesses must file Form 1095-B, and employers with more than 50 employees must file Form 1095-C.
7. Determine Your Payroll Policies for the New Year
Traditionally, businesses prefer to follow the same payroll schedule year after year, however, you may be considering a change to your current schedule. Today, many employees anticipate instant access to their paychecks, therefore you may want to consider pay-on-demand options if you don’t already have it.
The end of the year is the best time to implement a change, so evaluate those decisions now. Determine the paycheck deposit schedule you plan to use in the new year, as well as what options you’ll have for employees to receive their paychecks.
8. Check for Special Circumstances
While these things may not apply to all businesses in every calendar year, you may have some special tasks to complete if your business experienced any of the following:
- Newly hired employees or employees who didn’t complete a W-4 at the time of hire
- Employees with voided or reversed paychecks
- Employees or former employees with active payroll disputes
- If any of these situations apply, try to resolve these issues before the end of the year. If that isn’t possible, verify how these issues will affect your end-of-year payroll.
What to Do After the Last Payroll of the Year
After the final payroll of the year, your work is not yet complete. Be sure to do the following…
Finalize Wage, Tax, and Benefits Information
Be sure to give one final review to ensure complete accuracy before finalizing your last payroll for 2021. Add each employee’s wages, paid taxes, benefits earned, and calculate summary figures for your business.
This also includes any fringe benefits you offer, which are generally included in an employee’s income and can include personal and sick days, partial tuition reimbursement, company car, or stock options. Make sure that you report fringe benefits under employee earnings.
Distribute Forms W-2 to All Employees
Once the final pay period has ended and you have reviewed each employee’s payroll calculations, you can print and distribute Forms W-2. Some payroll providers will send Forms W-2 directly to your employees. Regardless of delivery method, employees must receive a copy (or have access to download a copy) of their Form W-2 by January 31 of the following calendar year, so these forms must be calculated and distributed quickly.
File Tax Forms with the IRS and Deposit Taxes Owed
Business tax obligations will vary by state, business size, industry, and several other factors. Most businesses, however, will be required to file:
- An annual business tax return;
- Forms W-2 and W-3 for each employee;
- Form 940 (your FUTA tax return) and deposit fourth quarter FUTA taxes by January 31; and
- Quarterly Form 941 tax return or the annual Form 944 by January 31, depending on when you file.
If your end-of-year payroll tax return shows that you owe taxes, these must generally be paid online via the IRS business tax website. While individuals generally have until April 15 to file personal income taxes each year, business tax returns and any taxes owed are generally due by March 15. Keep these important filing dates in mind as part of your year-end payroll tax checklist.
Review the Coming Payroll Year and Initiate Next Year’s Payroll Schedule
After you have completed this year’s payroll, review your payroll schedule for the next fiscal year. Check all period-ending dates and quarterly closing dates to make sure they do not fall on any major holidays, weekends, or other dates that would make it extremely difficult to process in a timely manner. Make any necessary adjustments to your schedule, then set up your new payroll plan for the coming year.
Account for State/Local Minimum Wage Changes
Many states have announced or have yet to announce minimum wage rate increases for the upcoming year. Since many wage increases become effective January 1, 2022, it’s important to take this into account when determining compensation for the upcoming year.
With a bit of due diligence and our end-of-year payroll checklist, you can successfully close this year’s payroll while establishing a smooth foundation for next year.
By using our checklist as a guide and consulting with a professional, you can help avoid fines and penalties for non-compliance, meet all required deadlines, and establish payroll practices that will help you retain workers through the new year.
Reach out to one of our financial experts here at MCDA CCG to walk you through each step of the end of the year payroll process.
Don’t put this off any longer and risk complications down the line, call our office headquarters in Placentia, Orange County, California today!