Payroll Year-End Preparation

Author: Rena Pirsos, XpertHR Legal Editor

At the end of each calendar year all employers are responsible for closing out the year's payroll in compliance with all federal, state and local income and employment tax laws and regulations. This involves much coordination and myriad detailed tasks that, if not carefully planned out in advance, can become nothing less than overwhelming. It also can result in costly penalties if mistakes are made.

Effective year-end preparation is actually a year-long process. As a major part of this process, an employer must file accurate and complete Forms W-2 and W-3 with the Social Security Administration (SSA); and, at the beginning of the following year, provide copies of Forms W-2 to employees. The information and wage and tax amounts the employer reports on Form W-2, Form W-3 and the four quarterly Forms 941 that are filed with the Internal Revenue Service (IRS) must match exactly. An employer also must provide copies of Forms 1099-MISC to independent contractors who have been paid at least $600 in cash for services performed and file copies with the IRS.

To complete and file these forms correctly, an employer must monitor not only legislative and regulatory changes that occur throughout the year, but also any changes in the values used to calculate the amount of taxes to withhold from employees' wages, fringe benefits and other payments due to annual inflation adjustments.

Using XpertHR's various tools and resources, which are updated on a regular basis, will help employers establish and follow good payroll practices and procedures all through the year to ensure a successful year-end that is free of noncompliance penalties and fines.


Determine Federal Income and Employment Tax Withholding

Plan a Successful Payroll Year-End


How To

How to Verify SSNs

How to Deal with Failed Employee Name/Social Security Number Verifications

How to Deal With IRS Lock-In Letters

How to Withhold on Supplemental Wages Using the Optional Flat Rate Method

How to Withhold on Supplemental Wages Using the Aggregate Method

How to Withhold on Supplemental Wages Over $1 Million


Policies and Documents

Payroll Year-End Practices and Procedures Checklist


IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

IRS Form 941, Employer's Quarterly Federal Tax Return, and Schedules B, D and R

IRS Form 944, Employer's Annual Federal Tax Return

IRS Form 945, Annual Return of Withheld Federal Income Tax

IRS Form 1099-MISC, Miscellaneous Income

IRS Form W-2, Wage and Tax Statement, and Form W-3, Transmittal of Wage and Tax Statements, and General Instructions

IRS Form W-2c, Form W-3c, Corrected Wage and Tax Statement and Transmittal Form

IRS Form W-4, Employee's Withholding Allowance Certificate


Employment Law Manual

Withholding Taxes

Taxation of Employee Benefits

Taxation of Employee Compensation

Unemployment Insurance Tax (FUTA/SUI)

Depositing and Reporting Withheld Taxes

International Payroll Issues

Payroll Solutions


Quick Reference

Social Security and Medicare Tax Rates and Benefit Amounts

Annual Retirement Plan COLAs and Fringe Benefit Limitations

Unemployment and Disability Insurance Taxable Wage Bases by State

Temporary Disability Insurance Requirements by State

Taxation of Supplemental Wages by State

Internal Revenue Code Conformity by State

Annual Reconciliation Return Forms and Deadlines by State

Form W-2 Electronic Filing Requirements by State

FUTA Credit-Reduction Rates by State

Health Care Reform Timeline


Worked Examples

Calculation of Gross-Up - Worked Example

Calculation of Excess Group Term Life - Worked Example

Calculation of FICA Withholding - Worked Example

Gross Repayment - Worked Example


Resource Centers

Health Care Reform Resource Center

Form I-9 and Immigration Issues Resource Center



Which fringe benefits are nontaxable to an employee?

What kinds of transportation fringe benefits may an employer offer its employees on a tax-free basis?

What payments are considered wages under the federal Internal Revenue Code (IRC)?

Will the IRS penalize an employer for failing to deposit and report withheld taxes?

May an employee be paid via a standard 1099?

How long must an employer keep Forms W-4?

Of what use is IRS Form 945?

Is the IRS Form 941-M still in use?

When does an employer have to comply with the Affordable Care Act's Form W-2 health care reporting requirement?


Related Glossary Terms

Electronic Federal Tax Payment System (EFTPS)

FICA (Federal Insurance Contributions Act)

Fringe Benefit

FUTA (Federal Unemployment Tax Act)

IRC (Internal Revenue Code)

IRS (Internal Revenue Service)

Lock-in Letter




Tax Deposit