Between juggling holiday schedules, closing out the books, and trying to carve out time with family, December and January can be full of distractions for many small business owners. To help you stay organized (and avoid last-minute surprises), we put together a simple, comprehensive year-end payroll checklist.
This year’s edition includes insights from Peggy James, CPA, an OnPay contributor who works with small businesses year-round. With the right prep, you can start 2026 strong — and maybe even relax a little along the way.
And for those who prefer to watch instead of read, check out our 12 days of sleighing year-end video series:
What is year-end payroll?
Year-end payroll is the process of finalizing payroll records, calculating and paying taxes, and sending out year-end payroll reports to both employees and government agencies. It’s an important task that ensures compliance with federal and state regulations and gives employees the information they need to prepare their own taxes during tax season in April.
Businesses need to be aware of year-end payroll procedures to avoid penalties, maintain accurate financial records, and fulfill their legal obligations.And while it operates a lot like any regular payroll run, year-end payroll also involves reviewing totals, entering final adjustments, and making sure everything is in sync before filings go out.
“Year-end payroll isn’t harder; just more detailed. Before you close the year, make sure all of your payroll numbers tie to your source documents. If you’ve been reconciling each payroll throughout the year, your December reconciliation will be quick. But if you haven’t kept up, you’ll need to go back and reconcile each payroll run to make sure everything matches your journals and bank statements.
This step is crucial as accurate reconciliation means your W-2s, 1099s, and tax filings will be correct when you submit them.”
— Peggy James, CPA and small business consultant
When is payroll year-end?
Payroll year-end follows the calendar year: January 1 through December 31.
That means:
Your final payroll of the year must run before December 31, 2025.
W-2s and 1099s must be distributed to workers by January 31, 2026.
Copies of those forms must be filed with the IRS (and some states) by the same date.
Heads up: Banks close for federal holidays like Christmas and New Year’s Day. If a payday falls on or near a holiday, run payroll early so employees aren’t paid late.
In the next section, we’ll explain which payroll reports need to be produced and sent, and by when.
Year-end payroll and HR checklist for 2025
Below is a handy year-end payroll and HR checklist you can bookmark on web and mobile so it’s easily accessible when you’re preparing payroll reports.
Verify worker information
Run an employee summary or W-2 preview report to confirm names, Social Security numbers, and addresses for all current and former workers. The accuracy of your year-end forms depends on the accuracy of your year-to-date payroll data, so it’s important to get it right. Take a moment to review everything carefully — including mailing addresses and phone numbers for employees and contractors you paid this year, even if they’ve left the company. Tools like the Social Security Number Verification Service can help verify employee IDs, and most payroll software lets you preview this information in an Employee Summary or W-2 Preview report.
“One of the biggest year-end headaches for small businesses is scrambling to collect missing tax IDs — especially for contractors and vendors you paid earlier in the year.
Some businesses don’t realize they need this information, and others feel awkward asking for it after the fact. But without a tax ID, you can’t file a 1099-NEC, and you risk missing the filing deadline.
My best advice? Collect W-9s before you pay anyone. Vendors are much more motivated to give you the information upfront when it’s tied to receiving payment, and it saves a lot of stress when January rolls around.”
— Peggy James, CPA
Review year-to-date payroll data
Run a year-to-date summary to ensure wages, taxes, deductions, bonuses, commissions, and off-cycle payouts are accurate. Fix issues now to avoid amended returns later. Whether you use payroll software or a ledger, it’s important to make sure the books are accurate before you close them for the year. If you’re using payroll software to file your taxes automatically, ensure that all contractor payments, W-2 earnings, and bonuses are completed prior to December 31, 2025 to ensure that tax payments can be made on time. Any adjustments or new entries after December 31 could put you on the hook for penalties and interest from the IRS and the state.
Plan bonus pay
If you’re issuing bonuses, schedule these runs well in advance, allowing enough time for them to be processed before December 31, 2025. Bonus payments may trigger next-day tax deposit rules or require extra processing time due to direct deposit limits.
“Supplemental wages like bonuses often have higher withholding. Let employees know in advance so they aren’t surprised by a smaller net amount.”
— Peggy James, CPA
Review or set holiday pay policies
Confirm which holidays your business will observe next year and update any rules around premium pay, scheduling, or floating holidays. Make sure your policy is documented and shared with employees.
Account for S Corp shareholder benefits
For 2% (or more) shareholders of an “S” election corporation, certain fringe benefits you receive are taxable. These include company-paid health insurance, company HSA contributions on behalf of the shareholder, and company-provided automobiles.
For 2% shareholders, company-paid health insurance and HSA contributions are only subject to Federal and State Income Tax (where applicable). Personal use of a company car, for example, is subject to all employment taxes.
The amounts paid by the company for these fringe benefits will need to be included in the shareholders’ earned income so that their W-2s are accurate at the end of the year. If you’re not sure how this works, you may want to ask your accountant for help (or spend a little more time looking into the ways you can pay yourself).
Record employer healthcare contributions
Has your business paid all or a portion of any employee health insurance premiums throughout the year? If so, that data needs to be reported on each employee’s W-2, along with any premiums that the employee has paid toward a company-provided plan. Contact your health insurance provider and request a document listing the total employee and employer contributions to healthcare for the current year. Even if the year is not over, your provider will have this information.
Document third-party sick pay
Third-party sick pay includes any insurance payments received by an employee through an insurance company and is considered earned income for the employee. The insurance company will provide a notice that details what should be added to the employee’s income. You’ll need to update this information no later than December 31st to ensure everything reflects accurately on the W-2s.
Account for fringe benefits
Record any taxable perks such as gift cards, gym memberships, or personal use of a company vehicle. These must be included in payroll history and year-end forms. For more information on taxable fringe benefits, please refer to IRS Publication 15-B.
Review 2026 federal and state law changes
Check for updates to minimum wage, state unemployment tax wage bases, or new paid family leave laws. Both states and the federal government periodically update tax and payroll laws, so it’s important to stay updated on these changes. These changes typically take effect on January 1.
Order new compliance posters
If you have at least one employee, you’re required to post up-to-date state and federal employment law notices in full view, and in an area frequented by all employees. Failure to display the correct state and federal employment law notices can result in penalties, fines, and potentially even lawsuits. With all the changes states have recently made, it’s a good idea to order new posters for your office every year.
Postmark year-end forms by February 2, 2026
If you mail W-2s or 1099-NEC forms yourself, they must be postmarked no later than 2/2/26 for the 2025 tax year. If you deliver copies to employees, whether that’s in person, digitally, or another way, you also need to provide them by 2/2/26.
You’re probably thinking, “Isn’t the deadline usually January 31?” Yes! But when January 31 falls on a weekend (as it does in 2026 – it’s a Saturday), the deadline moves to the next business day. That gives you a little extra time — though it’s still a good idea not to leave these forms to the last minute.
“Missing deadlines is one of the most common (and costly) year-end payroll mistakes — especially around W-2s and 1099s,” says Peggy.
Relax, reflect, recharge
Review your 2026 payroll calendar for pay dates and bank holidays — then give yourself a well-earned break.
Extra credit: Review reasonable compensation (if it applies)
Not required for every business — but if you have an S Corp, some accountants recommend using year-end to double-check that owner compensation still aligns with IRS “reasonable compensation” guidelines. It’s optional, but worth a quick review if applicable.
How to do year-end payroll
Year-end payroll isn’t dramatically different from your regular payroll process, but the stakes are higher because your final reports and tax filings depend on accuracy.
In Peggy’s experience, small business owners should:
Make sure all wages, bonuses, reimbursements, and deductions for the year are entered before the final payroll
Double-check tax withholding, especially for supplemental wages like bonuses
Reconcile payroll amounts against your books
Enter fringe benefits and third-party sick pay before generating W-2s
Run year-end previews (W-2, 1099-NEC, and payroll summaries) to catch issues early
How to reconcile payroll at year-end
Reconciliation ensures your W-2s, 1099s, and tax filings reflect accurate numbers.
Peggy recommends:
Reconciling every payroll throughout the year
If you haven’t, reviewing each run to ensure totals match payroll journals and bank statements
Confirming that year-to-date totals match what will appear on employee forms
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.
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Jacob Thomas is the Marketing and Technical Writer for OnPay. He has more than 10 years experience in writing about and teaching technology. He lives and works in his hometown of Atlanta.
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Year-end payroll FAQs
Why does it make sense to have an end-of-year checklist for payroll?
Processing payroll can be complicated, with a lot of moving parts, tax laws, and payroll reports to get right. The year-end payroll checklist included in this article will ensure that you can keep track of payroll records, file accurately and on-time, and don’t forget any important information. It can help you avoid errors and penalties, stay compliant with tax and payroll laws, keep your workforce happy, and improve your efficiency, saving time and money every year.
What forms do employers need to file?
Forms 941/944, 940, W-2s, 1099-NECs, and state unemployment returns.
What mistakes should small businesses avoid?
Running payroll too close to bank holidays
Missing January deadlines
Forgetting taxable fringe benefits
Waiting too long to collect W-9s
Not preparing for the 1099-NEC threshold increasing to $2,000 in 2026
How do you reconcile payroll totals?
If payroll has been recorded consistently, totals can be pulled from year-end reports. If not, total all payments manually.
