For small and mid-sized businesses, year-end payroll season is when everything must align, from pay rates to benefits and taxes. At CommPayHR, we believe preparation brings peace of mind. This guide outlines action steps to get started on now to stay compliant and begin the new year with confidence.
Review State Unemployment Rates
Every year, states issue new Unemployment Tax Rate notices, and they’re not always the same as last year’s. Review your notice carefully and make sure your payroll provider has the updated rate before your first January payroll.
If you manage payroll internally, double-check that your system reflects the 2026 rate. Errors here can mean incorrect tax payments and time-consuming adjustments.
Prepare for Minimum Wage Increases
Many states adjust minimum wage rates at the start of the year. Even if you don’t have hourly employees, pay attention to exempt salary thresholds that may change too.
Check your state’s Department of Labor website or the U.S. Department of Labor’s minimum wage chart for updates.
Double-Check Employee W-4s and Exemptions
Employees who want to continue claiming an exemption from federal income tax withholding must submit a new W-4 by Monday, February 16, 2026, according to the IRS.
Encourage staff to review their current withholdings, especially if they experienced a life event that will change their number of allowances. Life events include:
- Marriage or divorce
- New child or dependent
- Change in household income
- Spouse starting or leaving a job
Proactively collecting updated W-4s helps prevent under or over withholding issues later.
Verify Benefit Plan Renewals and ACA Reporting
Benefit renewals might not feel urgent during the holidays, but they directly affect payroll deductions and year-end tax filings. Here’s what to look for:
- All renewals are signed, stored, and shared with employees
- Payroll correctly reflects new deduction amounts
- Employer contributions are set to update automatically
If your benefits administrator provides new deduction files, confirm that they’re integrated before your next payroll cycle.
This is also the time to review your Affordable Care Act (ACA) reporting requirements.
- Applicable Large Employers (ALEs) are those with 50 or more full-time or full-time equivalent employees. They must file Forms 1094-C and 1095-C with the IRS and provide 1095-C copies to employees.
- Smaller employers who offer coverage through an insurance carrier should receive Form 1095-B from their insurer to distribute to employees.
Double-check with your benefits provider or payroll team that all forms are accurate, complete, and scheduled for timely submission.
Submit Third-Party Sick Pay
If your business uses an insurance carrier or third party to pay disability or sick leave benefits, make sure to report all 2025 payments before December 31. These amounts affect year-end tax reporting and employee W-2s.
Review Payroll Reporting Compliance
Before the year wraps up, take a close look at your payroll reports and tax filings. It’s much easier to correct discrepancies now than during January’s rush. A quick year-end reconciliation can help you catch small errors before they turn into bigger problems.
Use the following suggestions to guide your review:
- Confirm all quarterly filings (Form 941, state withholding, unemployment) are complete and accurate.
- Run a year-to-date payroll reconciliation to ensure totals match your accounting records and tax deposits.
- Verify employee details to avoid W-2 reprints: addresses, Social Security numbers, and names exactly as they appear on Social Security cards.
- Cross-check benefits and deductions to ensure premiums, 401(k) contributions, and other withholdings align with plan records.
- Review taxable fringe benefits (like company cars or bonuses) to confirm proper reporting before year end.
For a deeper walkthrough of the reconciliation process, check out our recent blog: Year-End Payroll Reconciliation: Why Accounts Payable Matters
A little attention here helps ensure your W-2s and 1099s are accurate, and your records are aligned.
Don’t Wait Until January to Catch Mistakes
By January, every correction becomes urgent. The best time to audit your payroll is now, before deadlines pile up. Look for:
- Missing employee terminations
- Incorrect benefit deductions
- Unpaid bonuses or commissions
- Outstanding reimbursements
- PTO accruals and related carryover policies
Taxable Fringe Benefits
If you plan to issue year-end bonuses, remember that timing matters. Bonuses paid in December count toward this year’s taxable income; those paid in January count toward next year’s. Either way, bonuses are subject to federal withholding, Social Security, Medicare, and applicable state taxes. Confirm your payroll system is set to handle these payments correctly, especially if you plan to issue separate bonus checks.
Fringe benefits—like gift cards, personal use of a company vehicle, or holiday awards—may also be taxable compensation depending on the type and value of the benefit. Many employers unintentionally underreport these items, which can cause compliance issues during tax filing.
To help you understand how to report these items correctly, another of our recent blogs, Top 5 Taxable Fringe Benefits Employers Forget breaks it down for you.
Peace of Mind Through Preparation with Commonwealth Payroll & HR
January should be about setting new goals for your business, not chasing down last year’s payroll details. Whether you handle payroll yourself or work with a provider, early planning makes all the difference.
At CommPayHR, we help businesses stay ahead of payroll and regulatory requirements all year long. In Q4, our clients receive exclusive access to our Comprehensive Year-End Payroll Guide and an interactive, webinar where our team of experts walks them through each step and answers their questions live.
Want that level of support for your business? Contact us today to learn about becoming a CommPayHR, client!
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