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Our Comprehensive Year-end Payroll Checklist

Updated on

January 9, 2023

By

by

Robyn Hollas

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When discussing the end of the year, most people are winding down from the year and are planning holiday parties and vacations. Those that are in payroll know this is the time of year that can save time in the new year by double checking key items. 

By verifying key information in Scissortail HCM, Sage HRMS, or your current payroll system, it can be the difference between starting a smooth new year and scrambling to make corrections. We will discuss these items to ensure a great year end and happy new year.

Take a few minutes to verify your business(s) information that is used for tax purposes. If the company has moved in the last year but has not updated the address with tax agencies such as federal, state, and local, it can be done at this time. You will want to verify the state you are headquartered in as well as the Employer Identification Number (EIN).

 If you have more than one EIN then you will need to verify each individual EIN for each entity. This is also a good time to prompt all employees to review his or her information as well if this has not been done during open enrollment.

With open enrollment in mind, now is the time to set up any new benefits and/or deductions in your payroll system. You can reach out to CS3 Technology with any questions or instructions on how to set up new benefits or deductions in Scissortail or Sage. You or someone on your team can send an email to support@cs3technology.com to utilize your SERV Plan for assistance.  

Sending out reminders to any employees with outstanding HSA (healthcare savings account) or FSA (flexible spending or dependent care accounts) can be helpful to employees with unused balances. Often this is a forgotten step for employees wrapping up the end of the year. Simple statements or reminders can be sent to ensure that all funds are utilized. It is not a payroll item, but you might also suggest a reminder about accrual balances to be used by year end. 

This is a great opportunity to ensure that your taxes balance, review tax deadlines and the proper tax forms are ordered if needed. It is always a good idea to keep accurate tax balancing throughout the year to help make the final balancing simple and straightforward. You can review the federal forms that you may need to file here. 

You can take this time to verify any special circumstance payrolls that may have occurred throughout the year that the wages and deductions are allocated properly. You will want to verify any voided checks balance the year end wages and taxes as well.

As with most businesses, hiring new employees never stops. Reviewing any new hires that may be included in the final payroll is vital. Verify all W4 information has been filled out correctly along with any direct deposit information. There will not be an opportunity to correct a new hire’s first payroll in the same calendar year if the first payroll is the company's final year end payroll. 

The final payroll of the year will need to be verified to ensure that taxes are balanced, last-minute wage changes are correct, and any year-end bonuses are paid. Bonuses may be paid on a separate payroll depending on your company’s policies or processes. You will want to make sure that any fringe benefits are paid correctly since this will be indicated on the employees’ W2.

Once the final payroll processing is complete, you can print and distribute your employees’ W2 forms if no further payrolls are processed. It is a good rule of thumb to wait until after January 1 of the new year to process theW2 forms. This ensures that any last-minute changes, updates, corrections or bonus payrolls are included in theW2 calculations. 

Depending on your payroll system, this is either completed in paper or electronic distribution or both. Scissortail HCM and Sage HRMS both offer paper and electronic delivery to all employees. Many tax services offer electronic upload for tax return processing. This is an additional value add for your employees to utilize electronic W2 delivery. It allows for faster tax return processing and accuracy. The deadline to mail or electronically deliver W2s is January 31 of the following year. It is a good idea to process the W2 as quickly and accurately as possible.  

You can also take this time to verify any new or updated 401k contributions for the first payroll of the year. Often 401k contributions are changed or updated at the beginning of a new year or quarter depending on the 401k plan. 

Creating a calendar for the Next year of Federal Reserve banking holidays as well as Company Holidays are important to have prepared for your payroll department and company’s employees. You can also either add the holidays to a separate calendar or prepare a calendar that also includes pay dates. Like many payroll software products, Scissortail HCM and Sage HRMS provide a place to track these to enable automatic holiday pay. 

If your company has made any policy changes to pay schedule or vacation, sick pay or paid time off (PTO),you can update the payroll system after the final payroll. Notifications to all employees of policy changes or reminders of the changes can be sent. It is a good idea to also post any changes to your company’s employee handbook. 

Most payroll systems offer notifications to be sent through the system by the payroll administrator so that each employee is notified individually. This can make the process less costly by sending electronically instead of printing each person a new copy. This also ensures documented delivery in case a manager is out of the office or misses distributing the paper copies due to a busy schedule. 

After your final year end payroll and prior to your first payroll in the new year, you will need to update each reporting state’s unemployment tax rate and taxable wage limit for each state that you pay wages. Verify that all terminated employees do not start the year with vacation or PTO balances or accruals, zero balances for any loans or garnishments and have been reported to states for child support or medical orders.  

With a bit of advance planning and review, you can start the new year prepared. As always if you need assistance, please reach out to your support team at CS3 Technology. We are here to help you finish and start the year strong.

In addition to your normal verification procedures, you can follow the steps below as they apply to your EIN(s):

1. Check Employee and Employer Indicative Data:

☑ Verify the employer and employee data that is used in processing your quarterly tax reports and W-2s.

☑ To which employees does the "retirement plan" indicator in Box 13 of Form W-2 apply?

☑ Confirm that employee names and Social Security numbers are in the correct format.

☑ The IRS may impose a penalty for each Form W-2 with a missing or incorrect Social Security number or employee name.

☑ Ensure that deceased employees are properly coded.

2. Check Wage, Tax And Benefits Data:

☑ Confirm that deferred compensation plan type is correct and verify employee contribution amounts.

☑ Ensure that other special tax items have been updated and submitted, such as Other Compensation, Third-Party Sick Pay, Employee Business Expense Reimbursements, Taxable Fringe Benefits, Tip Allocation information, and Dependent Care Benefits.

☑ Verify the employer state unemployment insurance tax rate and taxable wage limit for each state.

☑ Check for required backup withholding; verify amounts.

☑ Verify that withholding has been made properly or withhold from the final paycheck for taxable fringe benefits. These may include:

  • Group-term life insurance in excess of $50,000
  • Third-party sick pay (is the third party issuing a W-2?)
  • Personal use of company vehicle
  • Non-qualified moving expense reimbursements
  • Company-provided transportation or parking
  • Employer-paid education not related to the employee's job
  • Non-accountable business expense reimbursements or allowances
  • Bonuses
  • Non-cash payments

3. Check For Special Procedures:

☑ Schedule any special bonus payrolls for the current year.

☑ Request any special reports needed for year end.

☑ Ensure adequate payroll supplies to complete the year and to begin the new year, including blank checks, payroll forms and blank Forms W-2.

☑ Determine whether all adjustments are applied or that an adjustment payroll has been scheduled.

☑ Remind employees to fill out a new Form W-4 if their situation has changed.

☑ Obtain new Forms W-5 for Advance Earned Income Credit (EIC) for the new year.

☑ Confirm that all manual checks written during the year have been accounted for and updated in the system.

☑ Determine that all voided or reversed paychecks have been accounted for in the system.

After your last payroll, but before the first payroll of the new calendar year. Do the following:

1. Check Employee and Employer Indicative Data:

Review discrepancies such as missing addresses and missing or invalid Social Security numbers.

☑ Check the "purge" coding of any terminated employees who should be removed from the database.

☑ Ensure that terminated employees have zero balances for loans, garnishments, vacation, and sick time. These discrepancies were uncovered while preparing for the last payroll of the calendar year and should be corrected or adjusted.

2. Check Wage, Tax and Benefits Data:

☑ Determine whether Earned Income Credit (EIC) coding has been submitted properly.

☑ Review discrepancies such as --- negative quarter and/or year-to-date fields, and qualified pension coding discrepancies.

☑ Verify the employer's new state unemployment insurance tax rate and taxable wage limit for each state where the employer has workers.

☑ Verify new state disability insurance rate and taxable wage limit, where applicable.

☑ Test reasonableness of Social Security tax withholding (multiply total wages less excess wages by 6.2%).

☑ Verify the reasonableness of employer's matching Social Security tax.

☑ Test reasonableness of Medicare withholding (multiply total wages by 1.45%).

☑ Double-check the reasonableness of employer's matching Medicare tax.

☑ Test the reasonableness of state unemployment insurance tax (verify taxable wages and multiply by the employer experience rate).

☑ Compare payroll register totals to Form W-3 totals.

☑ Compare Forms W-2 to State and local report totals.

☑ Compare total wages reported for each tax; reconcile any differences.

☑ Does reported taxes from Form W-3 equal tax deposits (total of Forms 941)?

☑ Check contributions to and distributions from Section 125 (cafeteria) plan for childcare and for medical care reimbursements.

☑ Check for excess contributions to qualified plans, including 401(k), 403(b) and SIMPLE plans, especially for highly compensated employees.

☑ Check for required tip allocations for tipped employees.

☑ Ensure that any employee tax and/or taxable blocks have been removed, if not desired for the new year.

☑ Verify that employee requests for fringe benefit deduction changes for the new year have been applied.

☑ Confirm the settings and clearing of special accumulators for the new year.

3. CHECK FOR SPECIAL PROCEDURES:

☑ Schedule any special bonus payrolls.

☑ Verify that the new year month-end close-out dates are accurate.

☑ Verify that management reports for the new year are scheduled and will include the correct weeks and process.

☑ Confirm that for the new year the schedule of pay dates, period ending dates and quarter closing dates, are as intended and do not fall on holidays or weekends.

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