Year-end payroll doesn’t have to mean last-minute panic. Upgrading from pen and paper to software makes the process far smoother, but even automated systems aren’t foolproof if your underlying data is messy. To protect your business from IRS scrutiny, tax penalties, and unhappy employees, follow these nine essential tips to ensure your W-2s and 1099s are flawless before filing.
This article was made possible in part by OnPay. It was written and edited independently without partner oversight.
1. Waiting Until the Final Pay Run to Gather Records
It’s a bad idea to wait until you process the last payroll in December to start your year-end tasks. You can complete many tasks well before that. Payroll software helps you keep everything organized throughout the year by storing employee and payroll data in one place. Proactive planning eliminates the frantic hunt for paper forms, timecards, and spreadsheets that plagues manual payroll systems. The best apps even provide year-end alerts, checklists, reminders, and reports.
2. Failing to Verify Employee Data Before Filing
Accurate, up-to-date employee records are essential elements of your company’s payroll system. When you onboard workers, you should create thorough profiles for them with their contact information and other employment details, such as their benefits, job title, pay, and W-4 withholding. Whenever workers report changes to this information, you need to update their records immediately. Toward the end of the year, you should ask employees and contractors to verify the personal details you have on record.
With payroll software, you’re much more likely to have the correct information about employees and contractors on file. Once you create a record, you never have to enter its contents again; the information simply appears across the site wherever relevant. Workers can often set up accounts themselves via mobile or web apps, adding details such as their address and birth date. When you or an employee makes a change, the new information is updated everywhere in the system. Just note that if a change involves benefits, compensation, or withholding, an employee still needs to contact you directly.
Employee record in Square Payroll (Credit: Square/PCMag)
3. Misclassifying Employees as Independent Contractors
The IRS takes this distinction very seriously and often scrutinizes companies to make sure that independent contractors aren’t really employees whose employers aren’t paying self-employment tax or providing benefits for.
Payroll software helps administrators understand the differences between the two types of workers and sometimes includes questions clarifying workers’ roles during the onboarding process. It also separates employee pay reporting from contractor compensation during pay runs.
4. Overlooking Duplicate Payments and Calculation Errors
Even if you think you’ve been exceptionally careful about processing payroll manually, it doesn’t hurt to look for anomalies at the end of the year. Depending on how you’ve set up your system, this could take a while. Look for things like unusually large paychecks, duplicates, and missing benefits or payroll taxes.
It’s easier and less time-consuming to do this using payroll services, primarily because they can generate customizable reports. You should be able to, for example, examine pay stubs faster, view your payroll tax history, and see missing information in employee records, since all of your workers’ information is in one place. Payroll applications also have some error-checking tools, some of which use AI.
Report in Gusto (Credit: Gusto/PCMag)
5. Postponing Account Reconciliation Until Year-End
You may catch some errors with frequent checks, but year-end reconciliation will go far more smoothly and quickly if you take on this task quarterly. Still, “smoothly” and “quickly” are not words that can ever really apply to payroll reconciliation. Whether you do this manually or with the help of a payroll app that pairs with accounting software, it’s a massive, detail-heavy job. Prepare to set aside a lot of time and do a lot of cross-checking. Moreover, payroll apps don’t have a simple Reconcile button as you get in accounting solutions for quickly matching bank and credit card accounts.
Effectively, in the reconciliation process, you’re trying to determine whether everything that should match actually does. This might involve, for example, comparing totals in your payroll records to theirneral Ledger. Manual payroll systems typically don’t include a General Ledger, whereas payroll software does
Even in the best possible scenario, in which a payroll app integrates directly with an accounting app from the same company (Intuit QuickBooks Workforce and Patriot Software are two examples), you’ll still need to go back and forth between totals in reports and registers and their supporting data. Every payroll service I tested integrates with at least one accounting service, usually QuickBooks Online or Xero (or both), and provides resources that explain how to reconcile your records.
6. Forgetting Taxable Fringe Benefits and Extra Compensation
If you’re processing payroll manually, it’s easy to forget about bonuses, commissions, and other supplemental payouts (some of which you might have processed apart from regular payroll). You also need to stay on top of taxable fringe benefits, such as personal use of company cars, group term life insurance over $50,000, and non-job-related education assistance. Even employees who joined and left within a few months factor into the equation.
The best payroll software can prevent you from forgetting about non-typical compensation that’s still subject to taxes. For example, these apps can create special earnings categories so you can record the payments as they occur. Even short-term employees would show up in such reports.
7. Burying Manual Adjustments Without an Audit Trail
Mistakes are common if you’re doing payroll manually. For example, you might get a pay rate wrong, neglect to include a benefit deduction, or miscalculate a payroll tax amount. Payroll administrators sometimes have to make corrections to a past payroll, too. This isn’t ideal, of course, and you have to document it in such a way that it’s obvious when you’re closing out your year.
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Pay stub in ADP RUN (Credit: ADP/PCMag)
Many payroll services include some kind of audit trail, transaction list, or updated pay stub list, or they flag adjustments in another way (especially if they affected payroll taxes). These records are more obvious in some apps than others, but you might be able to see when you made the correction and what it entailed.
8. Neglecting Unused PTO and Accrual Payouts
This is one of those things that can fall through the cracks in the flurry of year-end tasks, but you can’t miss it. Some companies allow employees to roll over unused PTO hours into the next year, while workers at other businesses just lose them. If your policy is to pay employees for accrued time that they let lapse (your state must allow it), you need to include these figures in the final totals.
Payroll software can handle this task, usuallyormulas that legislate how workers earn PTO (such as one hour per 30 hours worked). The apps then track the implementation of these policies, keeping running tallies of hours earned and used
9. Generating Form W-2s and 1099s Prematurely
You have until Jan. 31 to create and distribute W-2 and 1099 forms, as well as submit reports to the IRS. It can be tempting to want to get this task out of the way soon after the first of the month because workers (at least the ones getting refunds) will be eager to start on their tax preparation, but you need to be completely certain that the forms have the correct totals. Therefore, this should be your final year-end payroll task.
Payroll software usually allows you to preview W-2 and 1099 data as a report before you create and distribute the actual documents. Once you wrap up the previous year’s payroll and triple-checked everything, you can go ahead and generate the final forms. Every payroll app I tested does this: filing the forms with tax agencies and making them available for workers to download. Printing and sending them
Why Modern Payroll Software Is Your Best Defense Against Year-End Errors
You might find all the potential for payroll mistakes discouraging, but you’re much less likely to commit costly year-end errors if you make a serious commitment to payroll accuracy throughout the year and take on some of the aforementioned responsibilities monthly or quarterly. The top payroll services I’ve tested make an error-free year-end process that much more attainable by centralizing your payroll and employee information, doing all required calculations, and providing detailed, customizable reports.
About Our Expert
Kathy Yakal
Contributor
Experience
I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute!
After working at Lawson Associates, now Lawson Software, I switched my focus to accounting but learned that personal computer applications were more progressive and interesting to cover than mainframe solutions. So I served as editor of a monthly newsletter that provided support for accountants who were just starting to use PCs. I still ghostwrite monthly how-to columns for accounting professionals. From there, I went on to write articles and reviews for numerous business and financial publications, including Barron’s and Kiplinger’s Personal Finance Magazine.
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