Simplify Year-End Payroll and Benefits for Stress-Free Tax Filing

As the year comes to a close, small business owners face the critical task of wrapping up payroll and finalizing employee benefits. While it might seem like an administrative burden, accurate payroll management and benefit accounting are essential to avoid penalties, streamline tax filing, and start the new year on the right foot. Here's your step-by-step guide to navigating year-end payroll and benefits efficiently.

Make Payroll Reconciliation a Priority

Before the year ends, take the time to reconcile your payroll records. Accurate payroll reports ensure that your business is compliant with IRS requirements and help you avoid discrepancies that can trigger penalties.

• Double-check W-2s and 1099s: Ensure that all wages, tips, and other compensation are correctly reported for every employee. Independent contractors should receive accurate 1099-NECs.

• Reconcile payroll tax deposits: Match your payroll records against the amounts reported to the IRS to confirm that all deposits were made accurately and on time.

• Address discrepancies immediately: If you identify any mismatches, work with your payroll provider or accountant to correct them before year-end deadlines.

Accurate payroll reporting sets the foundation for smooth tax filing and ensures employees receive correct documents for their own returns.

Handle Year-End Bonuses Properly

Many businesses reward employees with year-end bonuses, but it's essential to account for the tax implications of these payments.

• Withholding taxes on bonuses: Employee bonuses are subject to federal and state income tax, as well as FICA taxes. The IRS allows for a flat supplemental tax rate of 22% for bonuses, simplifying the process.

• Potential business deductions: Bonuses paid by December 31st are deductible on your 2024 tax return, providing a win-win for both your team and your bottom line.

• Communicate with employees: Make sure your employees are aware of the tax impact on their bonuses to avoid surprises when they receive their checks.

By managing bonuses correctly, you can reward your team while maintaining tax compliance.

Accurately Account for Employee Benefits

Employee benefits like retirement contributions, health insurance, and other perks can complicate year-end reporting if not handled properly.

• Retirement plan contributions: Verify that all contributions to employee retirement plans (e.g., 401(k), SEP IRA) are processed and reported correctly. Contributions made by December 31st can offer tax advantages for both the employer and employee.

• Health insurance and other fringe benefits: Review your records to ensure that the value of fringe benefits, such as employer-provided health insurance, is included in payroll reports where required.

• Non-cash benefits: Perks like gift cards or company-provided vehicles must also be documented and reported as taxable income, unless excluded by IRS rules.

Properly accounting for employee benefits ensures you comply with IRS regulations and avoid penalties while taking full advantage of eligible deductions.

Prepare for New Payroll Tax Changes

With a new year comes new payroll tax thresholds and requirements. Proactively addressing these changes ensures that you start 2025 on the right track.

• Review updated tax rates and thresholds: Check for changes in Social Security, Medicare, federal, and state unemployment tax rates. Adjust payroll systems accordingly to reflect the new limits.

• Update employee withholdings: Encourage employees to review and update their W-4 forms for 2025 to ensure accurate tax withholdings.

• Verify tax deposit schedules: Confirm your federal and state tax deposit schedules for 2025 to avoid late payments and penalties.

By preparing for upcoming changes now, you’ll avoid unnecessary stress and errors in January.

Avoid Penalties with Organized Recordkeeping

One of the biggest risks businesses face during tax season is disorganized or incomplete records. Accurate and accessible payroll documentation can save you from unnecessary penalties and IRS scrutiny.

• Maintain detailed records: Keep all payroll records, including pay stubs, tax filings, and benefit contributions, for at least four years, as recommended by the IRS.

• Digitize your records: Use payroll software or a cloud-based solution to securely store and organize your records for easy access during audits or tax filing.

• Work with a professional: If managing payroll and benefits feels overwhelming, consider outsourcing to a payroll service or consulting with a tax professional for expert guidance.

Proper recordkeeping not only keeps your business compliant but also saves time and reduces stress during tax season.

Take Control of Year-End Payroll

Closing out your payroll and employee benefits doesn’t have to be a daunting task. By following these steps, you’ll ensure compliance, avoid penalties, and position your business for success in the new year. From reconciling payroll to preparing for 2025 changes, proactive planning is the key to a smooth year-end process.

Need help navigating payroll or employee benefits? Our team at Bernstein Tax Group is here to assist. Contact us today to review your year-end payroll strategy and ensure your business is ready for tax season. Let’s finish the year strong!