2025 Year-End Payroll Checklist for Businesses

Please note: This checklist provides general guidance for businesses handling year-end payroll. Tesseon payroll clients receive a detailed, customized checklist with specific checks and dates tailored to their account.

Year-end payroll represents one of the busiest and most critical periods for business operations. Between managing final paychecks, preparing tax documents, and ensuring compliance with federal and state regulations, the process demands careful attention and thorough planning. Without proper preparation, businesses risk penalties, employee dissatisfaction, and complications that extend well into the new year.

This comprehensive guide breaks down the year-end payroll process into manageable steps, helping you close out 2025 efficiently while setting up your business for success in 2026.

Year-End Payroll Checklist at a Glance

Before Final Payroll (November – December)

• Verify business information (EIN, company name, address, state unemployment account numbers)
• Confirm employee information (names, addresses, Social Security numbers)
• Review wages, taxes, and benefits for accuracy
• Reconcile payroll records with general ledger
• Schedule year-end bonuses and special payrolls
• Order tax forms if filing manually

After Final Payroll (January)

• Final review of all employee and business information
• Generate and distribute W-2 forms to employees by January 31
• File W-2 and W-3 forms with Social Security Administration by January 31
• Distribute 1099-NEC forms to contractors by January 31
• File Form 940 (FUTA) by January 31
• File Form 941 or 944 (quarterly/annual employment taxes) by January 31
• Reconcile total payroll taxes for the year
• File state and local tax forms per jurisdiction deadlines

Preparing for 2026 (December – January)

• Update payroll system with 2026 tax rates and wage base limits
• Implement new minimum wage rates
• Verify 2026 payroll schedule accounts for holidays and weekends
• Process new W-4 forms and benefit elections
• Confirm payroll software is updated to latest version

Before Your Final Payroll of the Year

The groundwork for successful year-end payroll begins before you process that final paycheck. Taking time now to verify information and prepare necessary materials prevents scrambling later when deadlines loom.

Start by verifying all business information on file with tax authorities. Confirm that your company name, address, federal employer identification number, and state unemployment account numbers are accurate and current. Incorrect business information can delay tax filings and create unnecessary complications with government agencies.

Employee information requires the same careful review. Check that names match Social Security cards exactly, as even minor discrepancies can cause problems with W-2 processing. Verify addresses for all employees, particularly those who may have moved during the year. Confirm that Social Security numbers are complete and accurate in your records.

Review wages, taxes, and benefits for accuracy throughout the year. This means checking that all paychecks have been recorded properly, including any special payments made outside your regular payroll cycle such as bonuses, commissions, or reimbursements. Verify that tax withholdings align with employee W-4 forms and that benefit deductions match enrollment records.

Reconcile your payroll records with your general ledger. Total wages paid should match what appears in your accounting records. Tax deposits made throughout the year should align with amounts withheld from employee paychecks. Identifying discrepancies now gives you time to investigate and correct issues before filing deadlines arrive.

Consider whether your business will be issuing year-end bonuses or other special payments. If so, decide whether these payments will be processed in 2025 or 2026, as the timing affects which tax year they apply to. Schedule any special bonus payrolls well in advance to ensure your payroll provider or system can accommodate the additional processing.

After Your Final Payroll of the Year

Once you complete the last payroll of 2025, attention shifts to finalizing records and preparing required tax documents. This phase involves multiple deadlines and various forms that must be filed with different agencies.

Perform a final review of all employee and business information before generating tax forms. This represents your last opportunity to catch errors before distributing documents to employees and filing with government agencies. Look specifically for missing Social Security numbers, name mismatches, incorrect addresses, and any unusual wage or tax amounts that might indicate data entry errors.

Generate and distribute Form W-2 to all employees who earned $600 or more during the year. The deadline for providing W-2 forms to employees is January 31, 2026. File copies of Form W-2 with the Social Security Administration along with Form W-3, which serves as a transmittal summarizing all W-2 information. This filing is also due by January 31.

Prepare and distribute Form 1099-NEC to independent contractors who received $600 or more for services performed during 2025. Like W-2 forms, these are due to recipients by January 31, 2026. You must also file copies with the IRS along with Form 1096 as a transmittal document.

File your annual Federal Unemployment Tax Act return using Form 940. This form reports your FUTA tax for the entire year and is due by January 31, 2026. If you deposited all required FUTA tax when due, you have until February 10 to file. Any remaining FUTA tax balance must be deposited by January 31 to avoid penalties.

Complete and file your fourth quarter employment tax return. Most businesses file Form 941 quarterly, with the fourth quarter return due by January 31, 2026. Some small businesses with annual payroll tax liability under $1,000 may file Form 944 annually instead, also due January 31. These forms report federal income tax, Social Security tax, and Medicare tax withheld from employee wages, along with the employer’s matching portion of Social Security and Medicare taxes.

Reconcile total payroll taxes for the year. The amounts withheld from employees plus employer matching contributions should equal the deposits you made throughout the year. Address any discrepancies before filing year-end tax forms, as mismatches trigger correspondence from the IRS that requires time and effort to resolve.

File any required state and local tax forms. Requirements vary significantly by location, but most states have their own unemployment insurance reports, wage reports, and income tax withholding forms due in January or early February. Check deadlines for each state where you have employees, as missing state deadlines can result in penalties and interest charges.

Preparing for 2026

Year-end payroll is not just about closing out the old year but also setting up systems and processes for the year ahead. Taking care of these tasks now prevents issues when you process your first payroll of 2026.

Update your payroll system to reflect 2026 tax rates and wage base limits. The Social Security wage base for 2026 is set at $176,100. This means employees will pay Social Security tax on earnings up to that amount, and employers pay matching tax on the same wages. Medicare tax has no wage base limit and applies to all wages at 1.45 percent for both employees and employers, plus an additional 0.9 percent Medicare tax on employee wages exceeding $200,000.

Review and implement any new state or local minimum wage rates taking effect in 2026. Many jurisdictions increase minimum wage at the start of the calendar year, and your payroll system needs to reflect these changes to ensure compliance. Similarly, check for changes to state unemployment insurance tax rates, disability insurance rates, and other state-specific payroll taxes.

Verify that your payroll schedule for 2026 accounts for holidays and weekends. When a regular payday falls on a weekend or bank holiday, you need to adjust processing dates to ensure employees receive payment on time. Planning these adjustments in advance prevents last-minute complications and maintains employee trust in your payroll reliability.

Update employee information based on any changes communicated during the year-end review. This includes processing new W-4 forms submitted by employees, updating direct deposit information, and recording benefit elections made during open enrollment periods. Starting the year with accurate employee data in your system eliminates confusion and processing delays.

For businesses using payroll software, confirm that the system has been updated to the latest version with current tax tables. Most providers release updates automatically, but verifying the update completed successfully prevents processing errors when you run your first 2026 payroll.

Common Year-End Payroll Challenges

Even with careful planning, certain issues arise frequently during year-end payroll processing. Being aware of these potential pitfalls helps you avoid them or address them quickly when they occur.

Terminated employees often create complications. Ensure that former employees have zero balances for any outstanding loans, garnishments, or accrued vacation time that should have been paid out. Verify that final paychecks included all owed wages and that tax withholding was calculated correctly.

Fringe benefits require special attention at year-end. Taxable fringe benefits such as personal use of company vehicles, gym memberships, or certain moving expense reimbursements must be included in employee wages and reported on Form W-2. Some benefits need to be raised for tax withholding, while others can be reported without additional withholding.

Multi-state payroll adds complexity when employees work in more than one state or when your business has employees in multiple locations. Each state has its own income tax withholding requirements, unemployment insurance rules, and reporting deadlines. Ensure you understand which states have nexus for your business and what your obligations are in each jurisdiction.

The Value of Professional Payroll Support

Managing year-end payroll in-house demands significant time, expertise, and attention to detail. Many businesses find that partnering with a professional payroll provider eliminates stress while ensuring accuracy and compliance.

Tesseon’s payroll compliance services handle the complexity of year-end processing, from generating and filing tax forms to ensuring all deadlines are met. Our clients receive customized year-end checklists tailored to their specific situation, with clear guidance on what needs to happen and when. This personalized support means you’re never left wondering whether you’ve completed all required tasks or whether you’ve missed an important deadline.

With automated calculations, integrated tax filing, and expert support from dedicated representatives, Tesseon transforms year-end payroll from a source of stress into a smooth, manageable process. Our systems automatically update for new tax rates and regulatory changes, eliminating the risk of processing payroll with outdated information. By handling the technical details and compliance requirements, Tesseon enables you to focus on what matters most: running your business and supporting your employees.