Tax Compliance and Reporting 

For Small Businesses with 10 or Fewer Employees

Published January 29, 2025

PREVIOUS SECTION >> Part 1 - Payroll Setup and Management
NEXT SECTION >> Part 3 - Maintaining and Improving Payroll Operations

Part 2 - Tax Reporting and Compliance For Fewer Than 10 Employees

Welcome to Part 2 of the Payroll Manual! Let's do a quick recap of Part 1 of the manual.

In Part 1, I covered the building blocks of payroll management for your small business:

• Understanding worker classification and new hire documentation
• Processing key forms like I-9s and W-4s
• Managing payroll processing and recordkeeping
• Implementing basic accounting and reconciliation practices
• Choosing appropriate technology solutions
• Meeting current compliance requirements
• Planning ahead for growth

The key takeaway for Part 1 was that good payroll management is about creating consistent processes that work for your business size. Start with the basics, document your procedures, and build from there. Don't feel pressured to implement complex systems if simpler solutions meet your needs.

As I move into Part 2: Payroll Tax Reporting and Compliance, I will build on these fundamentals to help you understand your tax obligations and reporting requirements. I know this can be a headache for small business owners, but don't worry, I will break it down step by step.

In this section, I will tackle everything you need to know about W-2s, 1099s, federal and state payroll taxes, and those stressful but necessary year-end procedures. Understanding these requirements will not only help you avoid those nasty penalties but also give you peace of mind knowing you have met your annual payroll compliance obligations.

Remember that flowchart from earlier? You can see I'm now focusing on the tax reporting and compliance phase.

So grab your favorite beverage (water with lemon is mine right now), turn off your phone, and let's make sure your business stays on the right side of the IRS. By the time you finish this section of the manual, you will have a practical plan for handling your year-end payroll obligations.

INDEX for Federal Payroll Taxes Series

What is the purpose of a Form W-2?

A W2 Wage and Tax Statement is a summary of the wages and withholdings taken for each employee employed during the year. Employees must receive their W2 employment tax form by January 31st each year.

Overview of W-2:

• Shows total wages, taxes withheld, and other compensation on a cash basis (see sidebar).
• Prepare one for each employee by January 31st following the tax year.
• Send Copy A to Social Security Administration by January 31st following the tax year. It is same deadline for both paper and electronic filing.
• Give Copies B, C, and 2 to the employee.
• Keep Copy D for your records.

Before You Start

Key Preparation Tips:

• Double-check those SSNs! Use the free SSNVS system. (I'll show you how below).
• Pay attention to timing. Report wages when you paid them, not when they were earned. Yes, your books might use accrual basis (GAAP - generally accepted accounting principles), but W-2s always go by cash basis. You might need some year-end adjustments in your books (not the tax forms) to make everything match up.

Getting It Right - Employee Payroll Tax Slip Preparation Tips

1. Before you prepare your W2s, verify online that each name matches the SSN at Social Security Number Verification Service (SSNVS) at www.socialsecurity.gov/employer/ssnv.htm. Verification is free and highly recommended to avoid filing issues.
2. When preparing your W-2 employment tax forms, it is important to remember that for the purpose of tax filing deadlines, income is reported in the year it was paid not when the income was earned.
   
   Do NOT confuse this tax rule with GAAP reporting where you accrue unpaid but earned wage income in the year the wage was earned. This timing difference may require you book a yearend adjusting entry.
   
3. Take precautions to secure employee data. For W-2 employment tax forms, you must show the complete, untruncated SSN on Copy A (sent to Social Security Administration) and Copy 1 (sent to State/City/Local tax departments).
   
   Truncation is a security protection for employees. For identity protection, employers may truncate the SSNs on employee copies to help prevent identity theft. It is voluntary, not required, whether you truncate SSNs (show as XXX-XX-1234) on Copy B (given to the employee for federal tax return),  Copy C (employee's record copy), and Copy 2 (employee's state/local tax copy.
   
   Employer EINs may NOT be truncated on any form. State/local/territorial requirements may differ; employers should verify local rules.  Reference: Regulations sections 31.6051-1(a)(1)(i)(B), 31.6051-2(a), and 301.6109-4(b)(2)(iv).
4. Click here to find web version of the IRS General Instructions for the W-2 employment tax form. (There is also a pdf version of this page available.) This web page has links and instructions for the forms; box by box. Make sure you check out the first section called "What's New" to come up to speed about changes you need to be aware of.
   
   If for some reason the link doesn't work ... because they've updated it or renamed it ... at the time of this writing, the location for this employment tax form for the current tax year was at IRS website> Instructions> General Instructions for Forms W-2 and W-3 (2024).

Oops! Found a W-2 Error After Filing? Here's What to Do:

1. Don't panic - mistakes happen and there's a fix.
2. File Form W-2c (Corrected Wage and Tax Statement) ASAP.
3. File Form W-3c (Transmittal of Corrected Wage and Tax Statements).
4. Give your employee a copy of the W-2c.
5. If the error affects your payroll tax returns, you'll need to file Form 941-X.

Pro Tip: The sooner you catch and fix W-2 errors, the better. But even if you discover an error months later, you still need to correct it.

Early Filing Note:

The W-2 forms are due January 31st whether you file electronically or by paper.

The IRS has NOT prohibited early filing completely; even if all W-2, W2G and 1099-R forms have not yet been received. However, beginning with tax year 2023 (filing in 2024), they implemented new procedures:

1. The IRS began accepting and processing tax returns on January 29, 2024. The 2025 date is January 27, 2025.
2. Tax preparers CAN submit returns before receiving all W-2s and 1099s, but it's not recommended. It could delay processing and it might increase audit risk. They're a chance it could result in having to file an amended return.

Making It Easier For Yourself

Best Practices For Small Business Owners:

• Wait until you have ALL tax documents before filing.
• Match received forms against expected forms.
• Verify amounts against your records.
• Keep copies of all tax documents.

Tip: To protect employee data in your business, I suggest, at a minimum:

• Keeping W-2 employment tax information in locked files or password-protected digital storage.
• Limiting access to only essential personnel.
• Using secure methods when transmitting W-2 data.
• Shredding old documents containing SSNs.
• Never emailing unencrypted files with full SSNs.

Quick Tips for a Small Business with Less Than 10 Employees:
This tax season remember:

• You must provide W-2s to employees by January 31st.
• You should encourage your employees to wait for all tax documents before filing.
• Keep good records of all 1099s you receive from vendors and issue to contractors.

Go To Reference Guide* >> Employment Tax Form W-2 for more good stuff.

*This page serves as a reference guide about W-2 timing rules, reconciliation, and common questions asked.

Source: section 12 of Pub. 15 (Circular E)

What is the purpose of a Form W-3?

The W3 Transmittal of Wage and Tax Statements is a summary of all the W2s submitted to Social Security Administration (SSA).

Overview of W-3:

• This is your 'cover sheet' that totals all W-2 employment tax forms.
• Submit this with W-2s to Social Security Administration (by January 31st following the tax year).
• The same date applies whether you file electronically or by paper.
• It must match your quarterly 941 forms for the year (or annual Form 944).

Before You Start - Important Requirements

Keep this mind as you work:

• If you have 10 or more W-2s, you must file electronically
• The W-3 totals must match with the total of your 4 quarterly amounts reported on Form 941 during the year (or annual Form 944).
• All amounts reported on the W-2s must match the totals reported on the W-3.

Filing Options:

1. Electronic filing through SSA's Business Services Online (BSO)
2. Paper filing (if fewer than 10 W-2s)

Getting It Right - First-Timer's W-3 Filing Checklist

Filing your first W-3? Here's a straightforward checklist:

□ Gather all employee W-2s.
□ Total up all W-2 amounts.
□ Double-check your math (seriously, do it twice!).
□ Verify your business info matches your EIN card.
□ Compare totals to your 941s for the year. It should match.
□ Make a copy for your records.
□ Submit by January 31.

Pro Tip: Mark your calendar for early January to start this process. Rushing at the last minute often leads to mistakes.

Oops! My W-3 doesn't match my 941s? Here's What to Do:

Hey, it happens! If your W-3 and 941s don't match, try this:

1. First, take a deep breath - this is fixable.
2. Pull out all four quarterly 941s and add them up.
3. Compare those totals with your W-3.
4. Look for these common culprits:

•     Did you include non-cash payments (like bonuses) on W-2s but not 941s?
•     Were any adjustments made to 941s that weren't reflected in W-2s?
•     Did you remember to include tips?

5. If you find the error, file a W-3c to correct the W-3 (if you have already filed it).
6. Still stuck? This might be time to call your bookkeeper.

Making It Easier For Yourself - Current Year Instructions

Click here to find IRS General Instructions for Form W-3. This web page has links and instructions for the forms; box by box. Make sure you check out the first section called "What's New" to come up to speed about changes you need to be aware of. I chose this reference because it will always take you the current tax year unlike a pdf link.

If for some reason the link doesn't work ... because they've updated it or renamed it ... at the time of this writing, the location was: IRS website> Instructions> General Instructions for Forms W-2 and W-3 (2024).

Need some more help? Check out these resources:

• Current year W-2 instructions are available at ssa.gov/employer. You will always find the most current instructions here as opposed to accessing pdf instructions which are usually tax year specific.
• IRS Publication 393 (Federal Employment Tax Forms)
• SSA's Business Services Online Tutorial

Go To Reference Guide* >> Employment Tax Form W-3 for more good stuff.

*This page serves as a reference guide about common W-3 errors to avoid and reconciliation tips.

What is the purpose of a Form 1099-NEC?

If you've paid a contractor $600 or more in a year, you'll issue them a Form 1099-NEC by January 31st. Think of it as a tax form love letter, making sure both your contractor and the IRS know what’s been paid.

Threshold for Filing - You are required to issue a 1099-NEC if you have paid a contractor $600 or more in a year. This form reports the total nonemployee compensation they received.

Filing Deadlines - Prepare and submit Copy A of the 1099-NEC to the IRS and deliver Copy B to the contractor by January 31st each year. Keep Copy C for your records.

Avoiding Missed Deadlines or Penalties - Timely submissions and accuracy keep the IRS happy and your business penalty-free. Set reminders for deadlines and double-check entries before sending them off.

Handling Names on W-9s - If your contractor is using a "doing business as" (DBA) name, instruct them that the legal name must be on the first line of the W-9, followed by the DBA name on the business name line.

IC Checklist - You will find the steps to setup and manage IC in Part 1 of the manual.

Go To Reference Guide* >> Employment Tax Form 1099 for more good stuff.

*This page serves as a reference guide with more detailed information.

What is the purpose of a Form 1096?

Similar to the W-3 for employees, Form 1096 is used to summarize and transmit 1099 forms to the IRS for nonemployees (i.e. independent contractors).

Consider a Filing Service - To streamline this process, you might find it beneficial to use an online 1099 filing service, which can help ensure accuracy and timeliness.

Watch Out for Reclassification - If the IRS decides an independent contractor should be classified as an employee, you may face liabilities such as back payroll taxes, penalties, and interest.

Go To Reference Guide* >> Employment Tax Form 1096 for more good stuff.

*This page serves as a reference guide with more detailed information.

Let's chat about how to go about managing your payroll tax obligations at three levels: federal, state, and local. I'll walk you through each level.

Federal Payroll Taxes
These are the big ones that every employer needs to handle:

• Social Security (6.2% from both you and your employees)
• Medicare (1.45% from both sides, with additional 0.9% for high earners)
• Federal income tax withholding (based on each employee's W-4)
• Federal unemployment tax (FUTA) (6% on first $7,000, usually reduced to 0.6%)

Go To >> FICA and FUTA Employee Payroll Taxes

Tax Deposits
The IRS wants their money on a schedule - either monthly or semi-weekly, depending on your tax liability:

• Monthly: If you reported $50,000 or less in taxes for the lookback period
• Semi-weekly: If you reported more than $50,000
• Next-day: Required for $100,000+ in accumulated tax liability

Go To >> Remitting Payroll Tax Deposits

State Taxes
Each state has its own rules, but typically you'll deal with:

• State income tax withholding (except in states without income tax)
• State unemployment insurance
• State disability insurance (in some states)

Pro tip: Bookmark your state's department of revenue website - you'll visit it often!

Local Taxes
Some cities and counties collect their own taxes. Common examples:

• City income tax
• School district tax
• Transit authority tax

Practical Tips

1. Set calendar reminders for all due dates.
2. Keep separate accounts for payroll taxes.
3. Consider using a payroll service to automate deposits.
4. Document your deposit schedule and keep proof of payments.

Remember: Tax rates and rules change periodically. It's smart to check the IRS website quarterly for updates.

Tasks Summary:

1. Understanding Key Deadlines
2. Verify Employee Information
3. Review Wage and Tax Data
4. Process Final Payroll Adjustments
5. Prepare for the New Year
6. Data Backup
7. Best Practices
8. Additional Important Steps to Consider
9. Cautionary Note
10. Common Pitfalls to Avoid
11. Getting Help When Needed
12. Reliable Sources for Checklists

1. Understanding Key Deadlines

The IRS and state agencies have strict deadlines for year-end payroll reporting. Mark these dates on your calendar:

• January 31: W-2s and 1099s must be distributed to employees and contractors
• January 31: File Employment Tax Forms W-2 and W-3 with the Social Security Administration
• January 31: File Form 941* for the fourth quarter
• Various state-specific deadlines for unemployment and other reports vary

* It is important that Quarterly Form 941 due dates must be met throughout the year.

Meeting the SSA/IRS year-end payroll deadlines is significant for several reasons:

1. Avoidance of Penalties: Missing the deadlines for filing W-2s, 1099s, and other tax forms can result in financial penalties, sometimes significant ones. The IRS and SSA impose fines for late submissions, which can quickly add up and affect your business’s financial health.
2. Professional Reputation: As a business owner, meeting deadlines builds trust with your employees, vendors, and regulators.
3. Timely Tax Reporting: Employees rely on receiving their W-2s on time to file their personal tax returns. Meeting the deadline allows your employees can meet their own tax obligations without delay.
4. Smooth Year-End Process: Keeping on schedule helps streamline your year-end process, reducing last-minute stress and potential errors that can occur when rushing to meet deadlines.
   
5. Compliance with Laws: Adhering to these deadlines helps you stay compliant with federal regulations. Compliance reduces audit risks and potential legal issues that might arise from noncompliance.

Meeting these deadlines keeps your financial affairs in order and upholds your legal standing, contributing to the long-term health and reputation of your business. If you encounter challenges, seeking assistance from a CPA or payroll professional is prudent.

2. Verify Employee Information

Here are the steps to verify and confirm information for your employees. I am assuming you are using an online payroll application:

1. Verify the Employee Names, Addresses, SSNs:

• Log in to your accounting program and go to the 'Employees' or 'Payroll' module. 
• Check each employee's profile to verify their name, address, and SSN against their Social Security card and other official documents. I like to run a report that provides employee details rather than doing the review in real time as there are too many interruptions during a day.
• If any information is incorrect, update it in the payroll module.

2. Verify the Employee Status of Terminations and New Hires:

• Use the 'Employee Status' or similar feature to view recent updates, such as new hires or employee terminations.
• Keep employment documentation for new hires and employee terminations paperwork for those who have left on file.
• Revise the employee's status as active, terminated, or another relevant status categories as needed.

3. Review Classification of Employees vs. Contractors:

• Review job descriptions and responsibilities to verify correct classification.
• Check that contractors have signed agreements outlining their independent contractor status.
• Use your software to distinguish between employees and contractors. For example, in QuickBooks Online, contractors are found in the Accounts Payable module while employees are located in the Payroll module.

4. Benefit Elections and Deductions:

• Go to the 'Benefits' or 'Deductions area in your payroll program.
• Verify the benefit elections made by employees, such as health insurance plans. Again I like to work off of reports.
• Set up deductions correctly to reflect any benefit choices made by employees.
• Make any necessary changes to benefit details or deduction amounts.

It's important to note that many of these verifications can be integrated into your onboarding and exit processes. A proactive approach not only reduces your work load during the year-end review but also maintains continuous accuracy throughout the year. Once you have procedures and processes in place, only routine checks should be required. 

For example, implement standardized checklists for onboarding and exiting so you apply all necessary steps and verifications consistently. Conducting a quarterly or semi-annual review for  data accuracy allows for any necessary adjustments in a manageable time frame.

By having procedures in place and regularly reviewing this information, you can maintain accurate employee records as well as creating audit ready compliance with the numerous employment and tax regulations.

3. Review Wage and Tax Data

Accuracy is key when dealing with payroll. In general you want to reconcile all quarterly 941s with your payroll records. This is done by confirming these three things match - (i) your payroll reports, (ii) your bank statements disbursements, and (iii) your Form 941 reporting to the IRS.

For example, if your Q4 Form 941 shows you paid $50,000 in total wages, your payroll reports should show $50,000 in wages, your bank statements should show these payments, and your IRS account should show the related tax deposits. If these don't match, you need to find out why. It could be a timing difference, data entry error, or missed deposit.

Here's how I suggest you do this in more detail:

1. Verifying total wages paid:

• Start by printing or downloading detailed payroll reports from your accounting software. This should include gross wages for each employee.
• Add up the gross wages for the period you're reviewing (quarterly or annually) and check the total matches the sum reported on your Form 941.
• Cross-check these totals against your bank statements to verify that the wages paid out align with what's reported.

2. Confirming federal, state, and local tax withholdings:

• Use your accounting software to generate a payroll tax summary report which outlines all tax withholdings.
• Cross-reference these figures with the amounts reported on your quarterly Form 941 (Federal) and any state/local tax reports.
• If there are discrepancies, review any notices or correspondence from tax authorities for payments received or adjustment notices.

3. Reconciling quarterly 941 reports with W-2 employment tax forms totals:

• Gather all four Form 941s. Access payroll registers from your accounting software. Retrieve W-2 employment tax forms for your employees.
• Sum up wages, federal taxes withheld, Social Security, and Medicare from each Form 941 to get annual totals. Check these annual figures match the corresponding boxes on the W-2s (Box 1 for wages, Box 2 for federal tax, etc.).
• Look for mismatches between Form 941 totals and W-2s employment tax forms. Check for common errors like timing differences or manual adjustments. Make necessary corrections in your software.
• Verify that any discrepancies are addressed. Make sure the final W-2s reflect the corrected totals from your reports.
• Confirm tax payments align with liabilities reported on 941s.

4. Checking that fringe benefits are properly reported:

• Verify what fringe benefits you offer to employees (e.g., health insurance, retirement contributions) and make sure these are properly documented in your payroll system.
• Check how these benefits impact gross wages and tax calculations. For example, ensure that any taxable benefits are added to an employee’s gross wages and that the correct taxes are withheld.
• Generate a benefits report from your accounting system to verify the benefits match what is reported on the employees' W-2 forms at year-end.
  
  Here’s a breakdown of what you need to consider regarding fringe benefits and their correct reporting:

• Fringe benefits are additional compensation provided to employees on top of their regular salary or wages. These can include health insurance, retirement plan contributions, employee discounts, use of a company vehicle, educational assistance, and more.
• For your business, correctly reporting fringe benefits is important for determining your tax deductions. Some fringe benefits are tax-deductible business expenses, but the way they are reported can affect your overall tax liabilities.
  
• Fringe benefits might be taxable income for the employee. For example, if you provide a company car for personal use, it could add to the employee's taxable income, affecting their tax withholdings and liabilities.
  
• Ensure that all fringe benefits are accurately reported on your payroll system and on employees' W-2 forms. This includes determining whether the benefit is taxable or non-taxable. The IRS provides detailed guidelines on which benefits are taxable and how to calculate their fair market value.
  
• Some benefits, like certain health insurance premiums or contributions to retirement accounts, may be exempt from taxes. However, they still must be reported correctly to ensure compliance with tax regulations.
  
• It’s important to accurately value the benefits provided to employees. For example, if you provide a company car, you need to calculate the value of its personal use accurately based on IRS guidelines.
  
• Maintain accurate records of all fringe benefits provided. This is essential not just for reporting but also for substantiating tax deductions in the event of an audit.
  
• Consider consulting with a CPA or tax advisor to ensure compliance with all federal and state tax laws regarding fringe benefits. They can help identify which benefits are taxable and assist with proper reporting.

By ensuring that all fringe benefits are reported correctly, you help avoid potential issues with tax liabilities for both your business and your employees. Compliance with IRS regulations is essential to prevent penalties and to optimize your tax positions.

5. Ensuring special payments (bonuses, awards) are correctly classified:

• Record special payments such as bonuses or awards separately in your accounting system. Use specific accounts to track these payments.
• Understand the tax implications of these payments. Typically, bonuses and awards are subject to the same withholdings as regular wages and should be included in gross wages on payroll reports.
• Review individual pay stubs for special payments to confirm they have been taxed correctly and included in reported totals.

General Best Practices For A Business With Less Than 10 Employees:

1. Larger companies schedule periodic internal audits of their payroll system throughout the year to catch discrepancies early. However, having strong onboarding and exiting processes in place, as well as regular monthly reconciliations, conducting a detailed review of your payroll system only at year-end might indeed be sufficient for your small business. But start early, so any corrections can be made before December 31st. That said, you need these processes in place:

• Strong onboarding ensures new hires are properly set up in your payroll system from the beginning. Well-managed exiting processes helps to make sure the final pay, benefits, and tax documents are handled correctly for departing employees. Adhering to theses processes help reduce errors throughout the year.
• You need to perform monthly reconciliations. Monthly reconciliations mean you're keeping a close eye on your records consistently. This regular monitoring helps catch and address discrepancies quickly, minimizing the risk of significant year-end issues.
• Year-end procedures, when combined with the ongoing diligence discussed above, can be more efficient than conducting a full audit multiple times a year, especially for a small team. It allows you to consolidate efforts and focus resources where they're most needed.
• With a small employee base of less than 10 employees, the volume of transactions is relatively low, which makes a single, comprehensive year-end review manageable without compromising accuracy or compliance.
• As long as tax filings, payroll reporting, and benefit administration are done correctly on a monthly basis, the year-end review serves primarily to ensure everything aligns before you finalize reports and filings, like W-2s and 1099s.

2. It's important to ensure your accounting and payroll software work seamlessly together. If you use QuickBooks Online and subscribe to their payroll module, you shouldn't have an issue. Integration is a real time-saver for small businesses. It helps owners avoid the headache of manual data entry errors. By reducing manual data entry mistakes, you not only automate and streamline your processes but you also minimize payroll discrepancies and compliance issues that could otherwise cause major headaches down the line. QBO Payroll has direct deposit of pay checks as well as the option to setup auto payment of your payroll taxes to the government. I like that it removes a things off my 'to-do' list.

3. Think about consulting with a CPA, tax advisor, or payroll professional, especially when dealing with unique payroll situations or complex benefit structures. Some examples requiring guidance would be benefits, new tax laws, or uncommon situations (such as employee stock options or multi-state employment scenarios). This is especially helpful for small businesses that likely don't employ an in-house tax expert like large companies do.

By establishing and maintaining consistent and meticulous payroll records as well as relying on your payroll program, you can efficiently manage and verify all aspects of payroll reporting.

4. Process Final Payroll Adjustments

The adjustments referred to in this task require careful documentation to maintain compliance with the IRS and other regulatory agencies. I know I've already said this, but if you are unsure, chat with your professional bookkeeper or CPA to ensure all these adjusting entries are correctly processed.

The instructions I'm providing below are oversimplified but should get you started in the right direction. Don't forget to take notes every time you go through this process, especially if you learn something new while performing these tasks.

1. Holiday bonuses or special payments:

• Enter the bonus as an additional payroll item in your accounting software.
• Ensure appropriate tax withholdings are applied, similar to regular wages.
• Categorize the payment under employee compensation in your records.

2. Third-party sick pay:
     (See also Task 8.3 'Additional Important Steps to Consider' for more information on this topic)

• If a third party, like an insurance company, pays sick wages, record the payment in your payroll records.
• Include it on the employee’s W-2 employment tax form under appropriate boxes for reporting.
• Ensure FICA taxes are accounted for according to IRS guidelines.

3. Expense reimbursements:

• Record the reimbursement as a non-payroll expense entry, as it is not taxable income.
• Ensure the reimbursement is properly documented and attached to a specific business expense.

4. Taxable fringe benefits:
     (See additional notes about fringe benefits under task 3.4.)

• Add the value of the benefit to the employee’s compensation in your software.
• Calculate and withhold the correct taxes (income, Social Security, and Medicare).
• Report this on the employee’s W-2 as additional wages.

5. Void or canceled checks from throughout the year:

• In the banking module of your accounting software, void the check entry and ensure the associated payments are reversed.
• Check the adjustment is reflected in your bank reconciliation.

5. Prepare for the New Payroll Year

The following tasks will help ensure audit compliant payroll records and keep your processes streamlined. If questions or complexities arise, reaching out to support from your software provider or a CPA for advice is always a good idea. Setting up your payroll program for a new year:

1. Review updated tax tables:

• Login to your accounting program and go to the payroll module.
• Look for an option related to tax settings or tables.
• Compare the tax tables with the latest IRS and state tax rate publications to ensure they are up to date.
• If your software offers automatic updates, ensure that feature is enabled for tax tables.

2. Implement new minimum wage requirements:

• Identify new wage regulations applicable to your state or federal jurisdiction.
• Update your payroll settings in the software to reflect any new minimum wage requirements.
• Communicate changes to your employees, especially if their wages will be adjusted.
• Make sure all future payroll runs reflect these new wage rates. As far as I know, QuickBooks Online (in Canada at least) does not have a batch edit feature to hand minimum wage changes. It all has to be done by individual employees. (Wow. Automation? Not!)

3. Update payroll software and planning for benefit/regulatory changes: 

• Regularly check for software updates and patches; most systems prompt you when updates are available.
• Read any release notes to understand what changes or fixes are included.
• Stay informed on any upcoming regulatory changes through newsletters from your accounting software provider or relevant government bulletins.
• Use the planning tools or resources within your software to simulate the impact of changes in benefits or regulations on your business finances.

6. Backup Data

Regularly backing up your payroll (and accounting) data is a best practice. Here's my suggestion for managing your payroll data backups:

• Schedule regular automatic backups.  If you use QuickBooks Online, A Rewind subscription automatically backs up your company file. If you have QBO Advance, it has a backup system included. I'm hoping Intuit will extend the service to other subscription levels in the future.
• Make sure backups are stored in a secure, accessible format. Don't forget one simple backup option is to print PDF copies of your payroll reports as part of your backup plan.
• Use reliable cloud storage solutions that offer encryption and multi-factor authentication for added security.
• Don't forget to periodically test your backups to ensure data integrity and accessibility. For example, you don't want to find out your backup hasn't been working when you are trying to restore the data after a hard dive failure.
• Keep multiple backup copies in different locations.  I like the 3-2-2 backup strategy recommended by IT professionals today. Keep 3 copies of your data, store 2 copies locally but on different devices, and 2 copies offsite. One copy should be in a remote location and the other copy in the cloud or both copies are in the cloud but on other sides of the country. As Citynet.net says, "Securing your data and network from day-to-day threats is a core foundation of our business.". Just remember the general rule is you want your payroll data in more than one secure place.

In light of unexpected events like the December 2024 sudden closure of the trusted accounting software provider Bench Accounting, backing up your payroll (and accounting) data is absolutely critical.  Here are some key points to consider before you decide to skip this task:

1. If your accounting service provider suddenly shuts down like Bench Accounting did, you need immediate access to your financial records to manage your business operations effectively. Without backups, you risk losing access to your financial data that is so essential for day-to-day operations, financial reporting, and tax compliance.
2. Unexpected events like software shutdowns, cyber-attacks, or technical issues can disrupt your business. Backing up your data regularly reduces these risks by keeping a secure copy stored elsewhere or on a platform you manage.
3. Businesses must keep financial records to meet to legal and tax requirements. Without backups, they risk non-compliance if audited, potentially resulting in penalties or other legal issues.
4. As your business grows, you may need to switch to a new accounting system. Having a good backup will make the move much smoother. Backups help keep your data safe and ensures nothing gets lost or messed up during the switch. Trust me something always goes wrong during a conversion to a new system.
5. Historical financial data is really important for making smart business decisions and planning ahead. If you lose this data, it will be tough to see how your business was doing, assess performance trends, and create accurate five year business plans.
   
6. Lastly, having a backup of your financial records gives you peace of mind. It allows you to concentrate on running your business without stressing about losing data that could disrupt your work.
   

7. Best Practices

• Schedule a detailed payroll review
• Verify all software updates manually
• Consider state-specific requirements
• Maintain organized documentation system
• Address issues promptly as they arise throughout the year

8. Additional Important Steps to Consider

1. Verify all bonus payments, fringe benefits, and taxable non-cash compensation are properly recorded before year-end.
2. Review overtime calculations for the year to ensure compliance with FLSA regulations.
   
3. If applicable, check that all third-party sick pay has been properly recorded and reported.
   
   Third party sick pay are payments made to your employees for sick time or disability by someone other than you (the employer). The most common example is when you have a disability insurance policy for your employees, and the insurance company pays your employees directly when they're sick or disabled.
   
   Here's what you need to know:
   
   1. These payments are typically taxable wages.
   2. They must be reported on the employee's W-2.
   3. You're still responsible for the employer portion of FICA taxes.
   4. The insurance company should provide you with statements showing these payments.
   
   The tricky part comes with tax reporting. Sometimes the third party (insurance company) handles all the tax withholding and reporting. Other times, you need to include these payments in your payroll reporting. It depends on your arrangement with the insurance company.
   
   
4. Verify state unemployment insurance rates for the new year.
   
   - State unemployment insurance agencies typically send rate notices by mail or make them available online. Check your email. 
   - Go to the official website of your state’s department of labor or unemployment insurance agency. Many states provide rate lookup tools or post rate notices for employers online.
   - Once you have your new SUI rate, log into your online accounting software. Enter your new state unemployment insurance rate so future payroll calculations will be accurate.
   - If you haven't received your rate or can't find it online, consider contacting your state’s unemployment insurance agency directly for assistance.
   - Keep a copy of the rate notice for your records, as you may need it for reference or verification.
   
5. Review any special COVID-related credits or deferrals if still applicable.

9. Cautionary Notes

A. While payroll software does typically update automatically, sometimes updates aren't applied correctly. Always verify key numbers independently, especially for:

• Social Security wage base
• Federal unemployment tax (FUTA) wage base
• State unemployment insurance rates and wage bases
• Updated minimum wage rates (federal and state)
  

B. Backing up your payroll data is high priority. Recently, Bench Accounting closed without notice on December 27, 2024 after 13 years in business. Clients were locked out as the platform was shut down. Fortunately, Employer.com acquired the company on December 30, 2024 and clients once again had access to their data. This is never a good thing, but the timing just before the end of the year could have disastrous. In all fairness, Bench Accounting was making arrangements with clients to access their data to transition to another platform. Still ...

10. Common Pitfalls to Avoid

Watch out for these frequent mistakes:

• Missing deadlines for tax deposits
• Incorrect employee classifications
• Miscalculating overtime pay
• Forgetting to include taxable fringe benefits
• Improper handling of final paychecks

11. Getting Help When Needed

Reach out for expert help if you:

• Are unsure about complex calculations
• Have special situations like multi-state employees
• Need help with regulatory compliance
• Want to ensure accuracy in reporting

12. Reliable Sources for Checklists

• IRS Website: The IRS provides comprehensive tax guides for businesses, including annual updates to tax forms and filing requirements ([IRS.gov](https://www.irs.gov)).
• American Payroll Association (APA): Offers resources and checklists for payroll management but I find you need to be a member to access the information ([American Payroll Association](https://www.americanpayroll.org)).
  
• State-specific Tax Websites: Visit your state’s department of revenue or taxation website for state-specific details and requirements.
  
• Professional Accounting Firms and Payroll Organizations: Many CPA firms as well as reputable payroll companies like ADP publish year-end checklists and guides on their websites, often freely accessible.
  

Payroll regulations change frequently. It is prudent to check in with your professional bookkeeper, CPA or payroll service provider to ensure all your bases are covered. This task list and the check list below ensures nothing has been overlooked before moving forward with next year's payroll setup. It's much easier to catch and correct any issues now rather than discovering them after beginning the new year's payroll processing.

Final Thoughts

Regular payroll procedures and year-end payroll processing doesn't have to be overwhelming. By following these guidelines and staying organized, you can successfully keep on top of your payroll responsibilities throughout the year. This will aid in a smooth close out of your payroll year and starting your new year on solid footing. Remember, accuracy now prevents headaches later.

Pro Tip: Consider implementing a payroll software system if you haven't already. It can automate many of these tasks and reduce the likelihood of errors.

Need Help?

If you're feeling overwhelmed with year-end payroll tasks, consider working with a qualified professional bookkeeper who does payroll, a CPA or payroll professional. The cost of professional assistance often outweighs the potential penalties and stress of making mistakes.

This concludes my chat on employment tax forms.

My sincere gratitude to all my readers ... without you I'd have no website. Blessings to you all. My suggestion to you ... enjoy a tall cool glass of lemon water while you click and poke and peek and snoop this site ... perhaps start with the blog which lists the most recent updated articles.

I Hope You Enjoy Your Visit Today,
Your Tutor