Key Takeaways
- Verify all business and employee information early. Even small errors in EINs, addresses, or Social Security numbers can create big filing issues.
- Review 2026 compensation rules now. State and local minimum wage increases and the Social Security wage base of $184,500 all factor into next year’s payroll budget.
- Communicate to employees the deadlines for expiring benefits. Health FSA limits increase to $3,400, and the carryover limit increases to $680. All PTO, FSAs, and grace period rules require year-end clarity.
- Reconcile all 2025 paychecks before December 31. You want clean totals before generating W-2s and filing quarterly returns.
You’re definitely not the only one overwhelmed by EOY payroll tasks. I talk to a lot of Somerset County, NJ business owners around this time who are intimidated by this stack of hyper-technical tasks (that could mean future problems if something gets missed).
So before you run that final payroll of the calendar year, I want to give you a payroll checklist that breaks it all down.
Let’s take this one step at a time.
1. Verify your core business information
Before you run your last payroll, confirm that your legal business name, company address, EIN, and state unemployment account numbers are correct.
A mismatch here almost always creates problems for my clients when they go to file W-2s or submit electronic files to the IRS.
2. Make final decisions on year-end bonuses
If you use cash-basis accounting: Bonuses are deductible in the year they are paid.
If you use accrual-basis accounting: Bonuses declared before December 31 may be deducted this year if they’re paid by March 15, and only if employees are not required to remain employed on the pay date.
Bonuses to owner-employees follow stricter rules (especially in S corporations and personal service corporations, where deductions typically occur only when bonuses are actually paid).
Also worth noting: nondiscretionary bonuses, like attendance or production bonuses, need to be included when calculating overtime for nonexempt employees. And because the IRS treats bonuses as supplemental wages, you’ll need to choose between the 22% flat withholding rate or the aggregate method.
The bottom line here: No matter what kind of bonus you issue, it must be reported on Form W-2 and is subject to federal income tax, Social Security, and Medicare.
3. Communicate deadlines for expiring employee benefits
Year-end is also the moment to talk with your Bridgewater employees about benefits that may expire. If your paid time off policy includes “use it or lose it” provisions, employees need to understand whether their remaining vacation or sick days will roll over, expire, or require payout.
(Some states mandate payout of unused PTO at termination or year-end, so understanding your specific obligations is important.)
You’ll also want to talk to your employees about Flexible Spending Accounts, especially since the health FSA limit increases to $3,400 for 2026. Your plan will either offer a grace period that extends two and a half months into the new year OR allow a limited carryover of up to $680 maximum into 2027.
Your employees need to know which rule applies so they don’t unknowingly forfeit funds.
4. Confirm employee identifying information
Before generating W-2s:
- Verify full legal names (especially after marriage or divorce)
- Confirm Social Security numbers
- Update home addresses
- Check that deceased or terminated employees are properly coded
Missing or incorrect SSNs can trigger IRS penalties and force reprints.
If you generate your own W-2s, 1099s, or other information returns, make sure to order forms well before year-end. And remember that if you file 10 or more total information returns, the IRS now requires electronic filing.
5. Reconcile all 2025 paychecks
Of course, you’ll finalize your annual totals after the last payroll. But reviewing the numbers now can help you catch discrepancies early.
This includes verifying year-to-date wages, checking that all benefit deductions and garnishments have been handled correctly, reviewing disability or special payments, confirming that employees who exceeded the 2025 FICA wage base of $176,100 were taxed appropriately, and making sure any special exemptions were applied consistently.
Catching issues here before December 31 will make quarterly filings and W-2 creation way smoother.
6. Resolve any complicated payroll situations
Before closing out the year, take time to clean up any lingering payroll issues that could make your January filings sticky.
If you have new hires who never completed a W-4, now is the time to collect it. Review any voided or reversed paychecks to make sure they were handled correctly in your payroll system.
If there are unresolved payroll disputes, do your best to settle them before the year closes. Adjustments made after December 31 usually trigger corrected forms. Also, ensure that you’ve complied with state rules related to final pay for terminated or deceased employees.
A final word
The important thing here is that you give this year-end payroll checklist your early attention. Because every item you address now helps you start the new year with clean books and far less stress.
And if any part of this process raises questions for you – whether it’s bonuses, W-2 preparation, or compliance requirements – let’s talk:
calendly.com/william-torinoaccountinggroup
FAQs
“When is the absolute deadline to issue employee bonuses if I want to deduct them this year?”
If you use the simpler cash-basis accounting, the bonus must be paid to the employee before December 31 to be deductible in the current tax year. If you use accrual-basis accounting, you typically must pay it by March 15 of the next year, but only if the bonus was formally declared this year and payment isn’t dependent on continued employment.
“Do I have to include attendance bonuses when calculating overtime pay?”
Yes, if a bonus is non-discretionary (like an attendance or production bonus) it must be included in an employee’s regular rate of pay. This means you must go back and include the bonus amount when calculating their overtime pay for all hours worked during the period the bonus covers.
“How should I calculate tax withholding on employee bonuses?”
Either withhold a flat 22% of the bonus amount, or use the aggregate method, where you combine the bonus with regular wages and calculate withholding based on the total. Regardless of the method, the bonus is also subject to Social Security and Medicare taxes.
“What happens if I file a W-2 with an incorrect Social Security Number (SSN)?”
It can trigger IRS penalties against your business. You’ll have to create and file a corrected form (W-2c), which creates extra administrative work and delays the employee’s tax filing process.
“Why do I need to confirm employees didn’t exceed the FICA wage base?”
The FICA wage base is the maximum amount of an employee’s salary subject to the Social Security tax portion of FICA; for 2025, that limit was $176,100. You must verify that once an employee’s year-to-date earnings surpassed that limit, you correctly stopped withholding Social Security tax on any further earnings, though Medicare tax continues on all wages.
“What are the new limits for Flexible Spending Accounts (FSAs) my employees need to know?”
For 2026, the maximum amount an employee can contribute to a health FSA is increasing to $3,400. You must also clearly communicate whether your plan allows unused funds to have a two-and-a-half-month grace period OR a limited carryover of up to $680 into the next year, so employees don’t forfeit money.
“What are the tax implications if I have a new employee who never completed a W-4 form?”
If an employee fails to complete a W-4, the IRS requires you to withhold federal income tax as if they are a Single filer with no adjustments or as specified by state law for state taxes. It’s crucial to obtain a signed W-4 before year-end to ensure accurate annual tax reporting and avoid future issues.