Year-End Payroll and Tax Tips Every Small Business Must Know

As the year winds down, there’s more than just holiday cheer and New Year’s resolutions on the horizon. For small business owners, this time of year is a critical checkpoint to get your financial house in order. Properly managing payroll and tax adjustments before December 31st isn’t just a "nice-to-have"—it’s essential to keeping your business compliant, your employees happy, and your tax season stress-free. 

Whether it’s finalizing W-2s, accounting for bonuses, or making sure benefits are properly reported, there’s a lot to tackle. Let’s break it down into actionable steps to help you close the year on a high note.

Why Year-End Payroll Adjustments Matter 

Imagine kicking off the New Year only to realize you’ve overlooked key adjustments that result in penalties, missed tax deductions, or employee frustrations. It’s not the start anyone wants. Year-end payroll adjustments serve as a foundation for accurate tax filings, clean financial statements, and a smooth start to the next fiscal year. 

More than just compliance, these adjustments reflect your professionalism and commitment to your team. Employees count on accurate W-2s and timely bonuses, and the IRS counts on accurate reporting. Taking the time now to fine-tune your payroll ensures you’re starting the year with confidence, not cleanup. 

Key Payroll Adjustments for the Year-End 

Don’t Forget Group Term Life Insurance

If your business offers group term life insurance coverage above $50,000, any amount over that threshold becomes taxable income for the employee. This is one of those adjustments that can easily slip through the cracks if not monitored throughout the year. When missed, it can create compliance headaches during tax season. 

For businesses using payroll software, ensure the taxable portion is automatically calculated. If you’ve been handling this manually, take extra care to include it in Box 1 of the employee’s W-2. It’s not glamorous, but getting this right avoids unnecessary corrections later.

Address Personal Use of Company Vehicles

If your business provides vehicles for employees or owners to use for personal errands or weekend trips, that use is considered a taxable fringe benefit. This means that the value of the personal use must be reported as income. It’s a particularly relevant adjustment if you or your employees drive company cars for non-work purposes. 

Calculate the fair market value of the vehicle and estimate personal vs. business use to determine the taxable amount. Tools like mileage logs or GPS tracking systems can make this process much easier. 

Review Owner’s Health Insurance Contributions

For business owners who own more than 2% of the company and receive health insurance benefits, these contributions need to be added to taxable wages. This ensures that health insurance premiums are properly reported and accounted for during tax filings. 

Many small businesses handle this adjustment on the owner’s final paycheck of the year, so it’s important to connect with your payroll team or accountant to finalize the numbers. While you don’t necessarily need to withhold taxes on these amounts, accurate reporting ensures there’s no confusion when filing your tax return. 

Plan Bonuses Strategically

Bonuses are a great way to reward employees and boost morale, but they come with their own set of tax rules. Smaller bonuses can be added to regular payroll runs, but larger bonuses—like year-end profit-sharing—are subject to a flat 22% withholding rate for federal taxes. 

Additionally, if your employees participate in a 401(k) plan, consider how their bonuses may impact contributions. For example, bonuses can be used to max out contributions, which is a win-win for both you and your team. A quick meeting with your payroll provider can ensure these calculations are accurate and align with your tax strategy. 

W-2s and Compliance—No Room for Error 

One of the most anticipated (and scrutinized) aspects of payroll at year-end is preparing W-2s. These forms not only serve as an employee’s primary tool for tax filing but also represent your business’s attention to detail and compliance. Mistakes on W-2s can result in delays, corrections, and potential penalties, so this is not the place to cut corners. 

Ensure every employee’s wages, taxes, and benefits are accurately reflected. This includes taxable benefits like group term life insurance, company car use, and owner health insurance adjustments. Double-check your payroll records against your year-to-date reports for discrepancies. 

For those using payroll software, take advantage of built-in audits to flag potential errors before issuing forms. If you’re managing payroll manually, invest the extra time in cross-referencing to ensure accuracy. 

Pro Tips for Small Business Owners 

• Communicate Early: Let employees know about any taxable benefits or upcoming adjustments to avoid confusion when they receive their W-2s. Transparency goes a long way in building trust. 

• Keep Detailed Records: The IRS loves paperwork (and so should you). Maintain organized records for all adjustments, benefits, and bonuses. If you’re ever audited, detailed records are your best defense. 

• Lean on Experts: Your CPA or payroll provider can be your best friend during year-end adjustments. Don’t hesitate to reach out for guidance—getting it right the first time saves headaches later. 

Finish Strong and Start Fresh 

Tackling payroll and tax adjustments now might not be your favorite part of running a business, but it’s one of the most important. When you take steps to ensure compliance, accuracy, and timely reporting, you set the stage for a financially sound and stress-free start to the New Year. 

So, grab another cup of coffee, roll up your sleeves, and tackle these year-end tasks with confidence. Your future self—and your team—will thank you. Ready to take the next step? Click the 'Let’s Chat' button to connect with our experts and make this process even easier!