The Year-End Payroll Checklist in just 5 Steps

Making sure your payroll situation is wrapped at year's end might seem like a far off task, but that time goes quickly. Don't believe me? How many people put Christmas decorations before Thanksgiving? Seems like every year around this time, this question is posed to spark an interesting debate among friends. There is the hardcore, “Christmas can wait” crowd and the “I leave my lights up all year” group, but everyone can agree that now is the time we start to wonder where the year has gone! It seems like just yesterday we were making resolutions, going on summer vacations, or starting another school year and now we are gearing up to turn the calendar.

If you are like me, it is easy to lose track of all the things that need to be taken care of in the midst of the chaos. That’s where a checklist can come in! This article is going to discuss some of the most overlooked items that need to be considered when wrapping up a year at your business, specifically from a payroll perspective. Let’s jump in!

Fringe Benefits

It can be difficult to overlook paying an employee because, typically, the employee will remind you! But it IS easy to overlook the recording of fringe benefits for your employees. A fringe benefit is an additional benefit that you provide to your employee that is beyond their typical wages. For example, a company car can be considered a fringe benefit, subsidizing the cost of a meal can be a fringe benefit, and even a contribution to your employee’s retirement plan is a fringe benefit. It is important to understand your fringe benefits because some of these items have tax implications that need to be properly recorded. In typical IRS fashion, there is even a whole document on this subject called Publication 15-B. The purpose of this publication is to guide employers through the tax implications of fringe benefits to make sure they are being properly recorded. We’re going to cover a couple of the most common benefits below.

Personal Use of Company Car

Do your employees get to drive a company-provided car? That can be a cool benefit, but did you know that when the employee uses that car for their own personal use, it is most likely a taxable event? This means that throughout the year, the employee should be keeping up with the mileage that is being driven for personal use, which needs to be included in their W2 wages as a fully taxable amount at the standard mileage rate issued by the IRS. For example, if I drove my company car one thousand miles for personal use, I would need to have $585.00 added to my W2 as additional compensation based on the 58.5 cents per mile rate in 2022. If this applies to you, now is a good time to start communicating with your employees about this so that they can plan for the tax burden accordingly.

Group Term Life Insurance

Employer-paid life insurance is another fun benefit that a lot of employers provide, but did you know that this can be taxable to the employee? That’s right, in certain scenarios, if you provide a life insurance policy to your employees that contains a benefit greater than $50,000 of coverage, the amount of the premiums can be taxable to the employee. To make this even more difficult, the IRS publishes special tax tables in Publication 15-B that are used to calculate the amount of wages that need to be included.

S-Corp Health Insurance

Another area that we often see overlooked is the insurance premiums paid by owners of S-Corps. While it is possible to provide group insurance benefits to employees completely free from tax burdens, any owner of an S-Corp with greater than a 2% share isn’t considered an employee from the IRS’ perspective. This means that group benefits should not be deducted on a pre-tax basis from their checks, and even more, the premiums that the company pays on behalf of these owners are considered taxable income to the owner and needs to be recorded on their W2.

Everything else

While other fringe benefits need to be considered (awards, gym memberships, employee stock options, employee discounts, and moving expenses, to name a few), the three mentioned above are the most common benefits that we see get overlooked each year. Maybe all this talk of additional benefits and taxes isn’t your thing at all and you need more help figuring it out? No problem. Reach out to our team here, and we will gladly help you wrap up 2022!

And if you're considering changing payroll companies completely as the new year begins, be sure to check out our How to Switch Payroll Services Smoothly article. Making the change can feel scary, but with the right guidance, making the switch can actually be pretty simple.

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P.S. Year's-end is often bonus season! To help you make those payments in a way that matches your intentions, we wrote a great article all about the best ways to give bonuses to your employees. Check it out here!