Quick Summary
What this covers: The complete year-end payroll checklist for 2025, including compliance items your payroll provider won’t catch, audit reconciliation tasks, Gusto-specific steps, and 2026 tax changes.
Key deadlines:
- Last business day of December 2025: Final payrolls and bonuses
- January 23, 2026: Gusto W-2 mail order cutoff
- January 31, 2026 (extended to Feb 2): W-2/1099 distribution and filing
2026 changes to know:
- Social Security wage base increases to $184,500
- New W-2 reporting for tips (Box 12, Code TP) and overtime (Box 12, Code TT)
- FSA limit increases to $3,400
- Dependent care FSA jumps to $7,500
Who this is for: Business owners running payroll through Gusto, ADP, Paychex, or QuickBooks who want to avoid W-2 errors, IRS penalties, and February scrambles.
The real deadline for year-end payroll isn’t December 31. It’s mid-January, when your W-2s need to be accurate and ready for distribution. Every year, we see business owners scramble because they assumed their payroll provider handled everything automatically.
Some things get handled. Others don’t.
If you use Gusto, the good news is that most of the heavy lifting happens in the background. The bad news is that “most” isn’t “all”—and the items you own can create expensive problems if you miss them.
Table of Contents
The Payroll Compliance Items Your Provider Won’t Catch
Section summary: Your payroll software calculates wages and withholds taxes based on the information you feed it. These are the compliance items that require your manual verification before year-end—employee data accuracy, benefits reporting, retirement contributions, and contractor classification.
Employee Data Verification
Employee information is the foundation of accurate W-2s. Before your final payroll runs, verify every active and terminated employee’s name, Social Security number, and current address.
The IRS assesses penalties for each W-2 with a missing or incorrect SSN—up to $290 per form for 2025 returns filed in 2026. More importantly, an incorrect SSN causes problems when your employee files their personal tax return. Use the SSA’s Social Security Number Verification Service to confirm numbers before W-2s are issued.
If any employee changed their name in 2025 due to marriage or divorce, confirm that their W-2 name matches what’s on file with the Social Security Administration. A mismatch triggers processing delays and potential rejection.
Addresses matter too. Returned mail from outdated addresses creates follow-up work in February when you should be focused on other things. A five-minute verification now prevents hours of chasing down former employees later.
Benefits and Fringe Compensation
Benefits and fringe compensation are where most W-2 errors hide.
Did you provide group-term life insurance coverage over $50,000? The excess coverage creates taxable imputed income that needs to appear on the W-2. The IRS publishes tables for calculating this amount based on employee age—it’s not optional reporting.
Personal use of a company vehicle? Same story. The fair market value of personal use is taxable compensation.
S-corp health insurance premiums for shareholder-employees get added to Box 1 wages. This is one of the most commonly missed items we see. If you’re an S-corp owner and your business pays your health insurance premiums, those amounts must appear on your W-2 as additional wages (though they’re also deductible on your personal return, so it’s a wash for income tax purposes—but it affects self-employment tax calculations).
If you offered any non-cash compensation during the year—gym memberships, phone stipends, personal use of equipment—verify that those amounts have been recorded as taxable fringe benefits.
HSA and FSA contributions need verification too. The 2025 HSA limit was $4,150 for individuals and $8,300 for families. FSA limit was $3,300. If any employee exceeded these limits, you’ll need to correct before year-end.
Retirement Plan Contributions
Retirement contributions deserve a final audit before closing the year.
The 2025 401(k) elective deferral limit was $23,500, plus an additional $7,500 catch-up contribution for employees age 50 and older. If any employee hit or approached that ceiling, confirm their contributions stopped at the right point.
Over-contributions create correction headaches. The excess must be returned to the employee (plus any earnings on that amount), and if it’s not corrected by April 15 of the following year, the employee faces double taxation on that amount.
Verify that employer matching contributions were calculated correctly throughout the year. A miscalculated match in Q1 that went unnoticed compounds into a larger problem by December.
Contractor Classification
Before issuing 1099s, take a final look at your contractor relationships.
You’re required to issue Form 1099-NEC to any contractor who earned $600 or more during the year. This applies to individuals and unincorporated businesses. Payments to corporations are generally exempt—unless they’re for legal or medical services.
More importantly: review any workers you’ve treated as contractors throughout the year. Is that classification still correct? The IRS looks at behavioral control, financial control, and the type of relationship. If you’re directing when, where, and how someone works, they’re probably an employee regardless of what your contract says.
Misclassification penalties are steep. You could owe back employment taxes plus penalties and interest. If you’re uncertain about any worker’s status, get a review before year-end rather than after an audit.
Year-End Payroll Audit Checklist
Section summary: Before closing your books, reconcile your payroll records against tax filings. These audit tasks catch discrepancies before they become IRS notices—comparing register totals to W-3, matching quarterly 941s to annual figures, and verifying tax deposits.
Reconciliation Tasks
Compare your payroll register totals to your Form W-3 totals. The W-3 is the transmittal form that summarizes all your W-2s—if it doesn’t match your internal records, something is wrong.
Specific items to reconcile:
- Total wages paid vs. Box 1 wages (they may differ due to pre-tax deductions)
- Total Social Security wages vs. Box 3
- Total Medicare wages vs. Box 5
- Federal income tax withheld vs. Box 2
- State wages and withholding vs. state boxes
Match your quarterly 941 filings to your annual totals. Add up all four quarters—the sum should equal your W-3. If it doesn’t, identify the quarter with the discrepancy and trace it back to specific payrolls.
Verify your state unemployment wages and the tax rate applied. States assign experience ratings that change annually. If you received a new rate notice and didn’t update your payroll system, your quarterly SUI returns may be incorrect.
Check for any voided or reversed checks during the year. These should be properly recorded so they don’t inflate your wage totals.
Tax Deposit Verification
Confirm all federal tax deposits were made via EFTPS (Electronic Federal Tax Payment System). The IRS requires electronic deposits for most employers—if you’re still mailing checks, you may be subject to penalties.
Review your deposit schedule. Semi-weekly depositors have different deadlines than monthly depositors. A single late deposit triggers a penalty of 2% to 15% depending on how late.
Verify state withholding deposits are current. Each state has different deposit frequencies and thresholds.
If you’re subject to FUTA (Federal Unemployment Tax Act), confirm your deposits are current. FUTA applies to the first $7,000 of wages per employee at a 6% rate, though most employers receive a 5.4% credit for paying state unemployment taxes, resulting in a net 0.6% rate.
Documentation Review
Confirm you have current I-9s on file for all employees. You’re not required to reverify existing employees annually, but you should have the original I-9 from their hire date.
W-4 forms: If any employees claimed exempt from withholding in 2025, they must submit a new W-4 by February 18, 2026 to maintain that exemption. If they don’t, you’re required to begin withholding as if they’re single with no adjustments.
Verify state new hire reporting was completed for anyone hired during the year. Most states require reporting within 20 days of hire.
Provider-Specific Checklists
Section summary: Different payroll providers handle year-end differently. Here’s what you need to do in Gusto, ADP, Paychex, and QuickBooks—plus guidance if you’re considering switching providers at year-end.
If You Use Gusto
Gusto handles W-2 preparation and electronic filing automatically, but you still need to complete their year-end checklist to ensure accuracy.
Where to find it: Log into your account, navigate to Taxes & Compliance, and look for the checklist at the top of the screen. It typically becomes available in mid-November.
Timeline:
- Mid-November: Year-end checklist becomes available
- Early December: Draft W-2s available for review
- Mid-January: Final W-2s available to employees
- January 23: Deadline to order Gusto W-2 mailing service
- January 31 (Feb 2): Distribution deadline
The checklist walks you through confirming business information, reviewing employee data, and verifying benefits are correctly recorded. Don’t skip the prompts about health insurance reporting—both employer and employee contributions must be reflected on W-2s.
Bonus payrolls need to run by the last business day of December to be included in 2025 wages. Supplemental wages like bonuses have higher default withholding rates. Let employees know in advance so they’re not surprised by a smaller net amount.
Payments made outside Gusto: If you paid employees or contractors outside of Gusto at any point during the year—a manual check for an expense, a signing bonus before onboarding—report those payments through Gusto so they appear on the correct tax forms.
W-2 distribution options:
- Have Gusto mail them ($5 per person, order by January 23)
- Download and mail yourself
- Distribute electronically (employees must opt in by January 16)
If You Use ADP, Paychex, or QuickBooks
The core checklist items apply regardless of provider—verify employee data, confirm benefits are recorded, run bonus payrolls before year-end.
ADP and Paychex both provide year-end checklists through their portals, similar to Gusto. The primary difference is how much manual work falls to you versus what the provider handles automatically.
Larger providers often have more complex interfaces, which means more places for data entry errors to hide. Run a W-2 preview report before final processing to catch problems early.
QuickBooks Payroll integrates with QuickBooks accounting, which helps with reconciliation but creates additional places where mismatches can occur. Before closing the year:
- Verify payroll totals match your general ledger
- Run the Payroll Summary report and compare to your 941 filings
- Check that all paychecks are correctly categorized
Switching Providers at Year-End
If you’re considering a change, year-end is the cleanest breakpoint for switching payroll providers.
You close out Q4 with your current system, start Q1 fresh with the new one. No mid-quarter reconciliation headaches, no split-year W-2s to untangle. Your old provider issues W-2s for 2025; your new provider handles all of 2026.
Timeline: The transition process typically takes two days to a few weeks depending on how quickly you can provide the necessary information.
What you’ll need:
- Federal EIN and state tax ID numbers
- Employee demographic data (names, SSNs, addresses)
- Bank account information for direct deposit
- YTD wage and tax data (if switching mid-year—less relevant for Jan 1 starts)
- Benefits and deduction setup information
Before you switch: Review your current contract. Some providers charge early termination fees. Know what you’re walking away from before you commit to a new provider.
If you’re unhappy with your current setup, start the transition process in November or December to go live January 1.
2026 Changes That Affect Your First Payroll
Section summary: Several federal and state changes take effect January 1, 2026. Update your payroll system and communicate with employees about the Social Security wage base increase, new W-2 reporting for tips and overtime, benefit limit changes, and state minimum wage updates.
Federal Tax Updates
Social Security wage base: Increases from $176,100 to $184,500. Both employers and employees pay 6.2% on wages up to this threshold. For employees earning above the old limit, expect higher FICA withholding on early 2026 paychecks until they hit the new ceiling.
For an employee earning $190,000: In 2025, Social Security tax stopped at $176,100. In 2026, it continues to $184,500—an additional $520.80 in employee withholding ($8,400 × 6.2%).
Medicare tax: No change. 1.45% on all wages, plus an additional 0.9% on wages over $200,000 (single) or $250,000 (married filing jointly).
FUTA wage base: Remains $7,000 per employee.
New W-2 Reporting Requirements
The One Big Beautiful Bill Act created new deductions for tips and overtime that require separate W-2 reporting starting in 2026.
Tips deduction: Employees in “customarily tipped occupations” can deduct up to $25,000 in qualified tips ($50,000 for joint filers). The deduction phases out for high earners (AGI over $150,000 single / $300,000 joint).
Overtime deduction: Employees can deduct qualified overtime pay above their regular wage rate.
W-2 reporting:
- Qualified overtime: Box 12, Code TT
- Qualified tips: Box 12, Code TP
- Occupation code: Box 14b (for tipped workers)
For 2025, this reporting is encouraged but optional (penalty relief applies). Starting in 2026, it’s mandatory.
If you have employees who earn tips or significant overtime, they’ll want to understand these new boxes when preparing their tax returns. The IRS hasn’t finalized the complete list of “customarily tipped occupations,” so watch for updates.
Benefit Limit Changes
| Benefit | 2025 Limit | 2026 Limit |
|---|---|---|
| FSA (health) | $3,300 | $3,400 |
| HSA (individual) | $4,150 | $4,400 |
| HSA (family) | $8,300 | $8,750 |
| HSA catch-up (55+) | $1,000 | $1,000 |
| Dependent Care FSA | $5,000 | $7,500 |
| 401(k) elective deferral | $23,500 | $23,500* |
| 401(k) catch-up (50+) | $7,500 | $7,500* |
*401(k) limits for 2026 not yet officially announced at time of writing. Check IRS.gov for final figures.
The dependent care FSA increase from $5,000 to $7,500 is significant—a 50% jump. Communicate this to employees during open enrollment.
State Minimum Wage Changes
Multiple states are increasing minimum wage on January 1, 2026. Verify your payroll system has updated rates before running your first 2026 payroll.
Key states with January 2026 increases include California, Colorado, New York, Washington, and others. Check your specific state’s labor department for exact figures.
If you have employees in multiple states, verify each state’s rate is correctly configured.
Paid Family Leave Tax Changes
Starting in 2026, several states have new FICA and FUTA treatment for paid family and medical leave benefits.
Colorado: FAMLI benefits for employers with 10+ employees become subject to FICA and FUTA. The state will manage employee FICA withholding and notify employers.
Massachusetts: Medical leave benefit payments may be partially taxable depending on employer size and contribution split.
Maine: Similar taxability rules taking effect.
If you have employees in these states, watch for notifications from the state PFML programs about your reporting obligations.
Critical Deadlines
| Date | Action |
|---|---|
| Last business day of Dec 2025 | Process final payrolls and bonuses for 2025 wages |
| December 20, 2025 | SDO CPA clients: complete year-end checklist items |
| January 16, 2026 | Gusto: Employee deadline to opt into paperless W-2 delivery |
| January 23, 2026 | Gusto: Order W-2 mailing service by this date |
| January 31, 2026 (→ Feb 2) | Distribute W-2s and 1099s to employees/contractors |
| January 31, 2026 (→ Feb 2) | File W-2s with SSA, 1099s with IRS |
| January 31, 2026 (→ Feb 2) | File Form 941 (Q4) and Form 940 (annual FUTA) |
| February 18, 2026 | New W-4 required from employees claiming exempt status |
| February 28, 2026 | File Form 1099 (paper) if not filed by Jan 31 |
| March 2, 2026 | Furnish Form 1095-C to employees (ALE employers) |
Note: January 31, 2026 falls on a Saturday, so deadlines extend to Monday, February 2, 2026.
Frequently Asked Questions
When should I run my last payroll of 2025? Process your final payroll before December 31, 2025. If your regular pay date falls on or near a holiday, run payroll early—banks close for Christmas and New Year’s Day. Any payments processed in January, even for December work, typically count as 2026 wages.
What happens if an employee’s W-2 has an incorrect Social Security number? The IRS may assess a penalty of up to $290 per incorrect form for 2025 returns. The employee may also face delays when filing their personal tax return. Use the SSA’s Social Security Number Verification Service to confirm numbers before W-2s are issued.
Do I need to issue a 1099 to every contractor I paid? Issue Form 1099-NEC to any contractor who earned $600 or more during the year. This applies to individuals and unincorporated businesses. Payments to corporations are generally exempt unless they’re for legal or medical services.
My employee moved to a different state mid-year. How does that affect their W-2? You may need to issue a W-2 showing wages and withholding for each state where the employee worked. Most payroll providers handle multi-state reporting automatically if the employee’s work location was updated when they moved.
Can I correct a W-2 after it’s been filed? Yes, using Form W-2c (Corrected Wage and Tax Statement). However, corrections create additional work and may require the employee to amend their personal tax return. Catching errors before filing is significantly easier.
What’s the difference between the W-2 filing deadline and distribution deadline? For 2025 tax year forms, both deadlines are the same: January 31, 2026 (extended to February 2). W-2s must be provided to employees AND filed with the SSA by this date.
Should I switch payroll providers at year-end or mid-year? Year-end is cleaner. Your old provider handles all of 2025 including W-2s; your new provider handles all of 2026. No split-year reconciliation, no transferred YTD data to verify. Start the transition process in November or December to go live January 1.
Does Gusto file my W-2s automatically? Gusto electronically files W-2s with the SSA and applicable state agencies. You still need to complete the year-end checklist to verify information is accurate, and you’re responsible for distributing copies to employees.
What are the penalties for late W-2 filing? Penalties range from $60 to $310 per form depending on how late you file, with a maximum penalty of $3,783,000 per year for large businesses. If you file within 30 days of the deadline, the penalty is $60 per form. After August 1, it’s $310 per form.
How do I report S-corp health insurance on a shareholder-employee’s W-2? Add the health insurance premium amount to Box 1 (wages) and Box 14 (other). It should NOT be included in Boxes 3 and 5 (Social Security and Medicare wages) for more-than-2% shareholders. This is commonly misconfigured in payroll systems.
Next Steps
If you’re a current SDO CPA payroll client, you should have received our year-end checklist email with specific deadlines for your account. Complete the items by December 20 to give us time to review before the holiday break.
If you’re handling payroll yourself—or working with a provider that creates more problems than it solves—we can help you transition to a system that actually works. Our clients use Gusto because it handles compliance automatically while giving us the visibility we need to catch problems before they become expensive.