Payroll Checklist

A step-by-step compliance guide to each pay period, month and calendar quarter of the year

Avoid penalties with strict compliance. Use this checklist:

Each Payday

  • Withhold federal and state income tax based on each employee’s W-4 form.
  • Withhold the employee’s share of FICA.
  • Withhold the employee’s share of state unemployment/disability contributions, as necessary.
  • Figure the amount of FUTA tax and SUTA tax for each employee.
  • According to your tax deposit schedule, deposit via EFT, employees’ withheld income tax, and employees’ and employers’ FICA.
  • Deposit state taxes according to the appropriate schedule and in the appropriate medium.
  • Adjust wages and taxes as discrepancies arise. Look for negative wages.

After Each Month

  • Reconcile your tax register and bank accounts.
  • Research outstanding checks that are older than 30 days; post unclaimed checks to an
    unclaimed earnings escrow account.
  • Document gross-to-net calculations for manual checks; ensure that manual checks and
    voids are entered properly; review the general ledger accounts.
  • Record the names of employees who work full time and the names of employees who
    change status from full time to part time and vice versa.
  • Figure the total number of employees who worked during the month.
  • Figure the total number of full-time employees who worked during the month.

After Each Quarter

  • For income tax withholding, create a worksheet to reconcile taxable wages, from Form 941, Line 2 to taxable wages, as recorded in a wage summary report; also, reconcile the tax amount, from Form 941, Line 3 to taxable wages, as recorded in a wage summary report.
  • Create a worksheet to reconcile your state tax liability to state taxable wages, as shown in a wage summary report; also, reconcile state taxes withheld to state taxes deposited.
  • Tie federal income tax withholding totals to state income tax withholding totals.
  • For Social Security tax withholding, create a worksheet to reconcile taxable wages, from Form 941, Line 5a to taxable wages, as recorded in a wage summary report; also, reconcile the tax amount, from Form 941, Line 5a to the taxable amount, as recorded in a wage summary report.
  • For Medicare tax withholding, create a worksheet to reconcile taxable wages, from Form 941, Lines 5c and 5d to taxable wages, as recorded in a wage summary report; also, reconcile the tax amount, from Form 941, Lines 5c and 5d to the taxable amount, as recorded in a wage summary report.
  • Create a worksheet to reconcile FUTA tax liability to FUTA taxable wages, as recorded in a wage summary report; also, reconcile FUTA tax amounts to FUTA tax calculations.
  • Create a worksheet to reconcile SUTA tax liability to SUTA taxable wages, as recorded in a wage summary report; also, reconcile SUTA tax liability to SUTA tax amounts.
  • Tie FUTA totals to SUTA totals.
  • Create a worksheet that reconciles the Form 941 totals and wage summary totals to Forms W-2/W-3.
  • Balance quarterly reports and Forms 941 to the general ledger.
  • After filing Form 941 for the quarter, make interest-free adjustments of underreporting errors by filing Form 941-X by the due date of Form 941 for the quarter during which the error is discovered, and pay any tax due. Also, file Forms W-2c/W-3c, as appropriate
Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year

Claim your FREE copy of Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year!

PRINT TO PDF

January

  • Notify the mailroom of the date your W-2s will be mailed out. Remind mailroom personnel to have sufficient postage in the postage machine.
  • Do a preliminary run of your W-2s on plain paper. Verify your totals against your annual reconciliation worksheet.
  • Prior to processing your W-2s and fourth-quarter 941 forms, verify that the general ledger liability accounts balance. What to look for: employer/employee tax withholding accounts. Be prepared to make correcting journal entries for out-of-balance situations caused by yearend adjustments.
  • If you need an extension of time to file W-2s or 1099s, file Form 8809 with the IRS now.
  • Renew third-party designee status on annual 940, 944, and 945 forms.
  • Use the SSA’s free Accuwage software to check balances before distributing W-2s. Accuwage is available at www.ssa.gov/employer/accuwage/index.html.
  • Explain to employees that W-2 Box 1, 3, and 5 entries may differ due to pre-tax deductions.
  • Send memos to employees explaining that they are receving Form 1095-C and Form 1095- B so they can comply with the health care reform law’s requirement that most taxpayers carry health insurance.
  • Check that employees’ requests for duplicate or corrected W-2s are signed by employees and that signatures are legitimate. This ensures that ex-spouses haven’t slipped one by employees.
  • For corrected W-2s issued to employees prior to filing, check the Void Box on Copy A, and insert “Corrected” at the top of Copies B, C, and 2.
  • Make sure your system-generated mailing labels reflect employees’ current addresses.
  • Before transmitting data to the SSA, randomly sample from the beginning, middle, and end of an employee record. What should match: the employee’s name, address, Social Security number, wages, and taxes.
  • Determine whether you’ve offered at least 95% of your full-time employees health benefits during the prior year for Form 1094-C reporting purposes, and ensure that benefits are offered to at least 95% of your full-time employees during the current year.
  • By January 31 (or the next business day, if January 31 is a non-business day), give employees their W-2 forms; give retirees their 1099-R forms; give 1099-MISC forms to independent contractors.

File paper and electronic W-2s with the Social Security Administration.

File paper and electronic 1099-MISC forms on which non-employee compensation is reported in Box 7 with the IRS.

When logging onto the SSA’s business services online, check the characters of your user ID and activation code. For example, a capital “O” could be mistaken for a zero, or a lowercase “l” could be mistaken for a one. Try the other choice if your first choice doesn’t work.

File your fourth-quarter 941 form (if you didn’t deposit taxes for the quarter in full and on time). You may pay taxes directly to the IRS with your form if your total tax liability for the current or preceding calendar quarter is less than $2,500.

Annual filers file form 944 for the previous year. Deposit any undeposited tax. If the total is less than $2,500 and not a shortfall, you can pay the tax due with your return.

File Form 940 for the previous year. If the undeposited FUTA tax for the last quarter of the previous year is $500 or less, you can pay it with your return or deposit it. If it’s more than $500, you must deposit it.

File Form 945 to report income tax withheld during the previous year on all non-payroll items, including backup witholding and withholding on pensions and annuities. Deposit any undeposited tax.

February

  • Reconcile all 941 forms for the year or Form 944 totals with your W-2 totals. What must balance: Social Security and Medicare wages/tips, and federal income tax withheld.
  • By February 10 (or the next business day, if February 10 is a non-business day), file fourthquarter 941 forms, and 940, 944, and 945 forms, if you deposited taxes for the quarter (for 941s) or for the year (for 940s, 944, and 945s) in full and on time.
  • By February 15 (or the next business day, if February 15 is a non-business day), ask for a new W-4 form from each employee who is claiming an exemption from income tax withholding in the current year.
  • By February 16, begin withholding income taxes for any employee who claimed an exemption from income tax withholding last year, but who didn’t file a new W-4 claiming the exemption from the current year.

By February 28 (or the next business day, if February 28 is a non-business day), send W-2c forms to the SSA as soon as W-2 errors are discovered.

File Copy A of all paper 1099 forms (except 1099-MISC forms on which non-employee compensation is reported in Box 7) with the IRS. File paper 1095-C or 1095-B forms, accompanied by the appropriate transmittal — 1094-C or 1094-B — with the IRS.

Reply promptly to any SSA notice that W-2 totals for a year disagree with IRS 941 totals.

Respond in a timely fashion to SSA’s request for corrections to W-2 identity data.

March

  • By March 31 (or the next business day, if March 31 is a non-business day) file 1099 forms (except 1099-MISC form on which non-employee compensation is reported in Box 7) with the IRS. File electronic 1095-C or 1095-B forms with the IRS. This due date applies only if you file electronically.

April

  • By April 30 (or the next business day, if April 30 is a non-business day), deposit FUTA tax, if it’s more than $500.

File your 941 form for the first quarter of the year (if you didn’t deposit taxes for the quarter in full and on time). Deposit any undeposited tax. You may pay taxes directly to the IRS with your form if your total tax liability for the current or preceding calendar quarter is less than $2,500.

Filers of annual Form 944 deposit taxes withheld during the first quarter, if the total withheld is less than $2,500.

May

  • Treat summer hires as you would treat any new employee (i.e., have them present their Social Security cards, and use SSNVS to verify that their names/SSNs match; report them to the appropriate state agency; have them complete Forms W-4 and I-9).
  • Some special handling is required of summer hires, however: don’t enroll them in your benefit plans (a manual override is necessary if you have auto-enrollment cafeteria and 401(k) plans); students probably aren’t exempt from federal income tax withholding (provide them with IRS Pub. 3136), but they may be exempt from state withholding, so have state forms for them to complete.
  • Summer hires who are family members require additional considerations: if you hire your children, thoroughly document their work to avoid suspicion that you’re deducting their allowance as a salary expense; pay them when other employees are paid and what other employees with comparable duties are paid.
  • By May 10 (or the next business day, if May 10 is a non-business day), file your firstquarter 941 form, if you deposited the taxes for the quarter in full and on time.
Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year

Claim your FREE copy of Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year!

SHARE WITH YOUR TEAM

July

  • By July 31 (or the next business day, if July 31 is a non-business day), deposit FUTA tax, if it’s more than $500.

File your 941 form for the second quarter of the year (if you didn’t deposit taxes for the quarter in full and on time). Deposit any undeposited tax. You may pay taxes directly to the IRS with your form if your total tax liability for the current preceding calendar quarter is less than $2,500.

Filers of annual Form 944 deposit taxes withheld during the second quarter, if the total withheld is less than $2,500.

August

  • Download and review changes to the SSA’s W-2 e-filing specifications: Electronic Filing
    of W-2s (EFW2) EFW2 specifications are available at the SSA’s website: www.ssa.gov.
  • First-time e-filers can take an SSA-provided tutorial; all e-filers can use the SSA’s
    Accuwage program to test files for errors. Surf to www.ssa.gov for information.
  • Review payroll-related PINs. Electronic depositors who open new bank accounts must also get new PINs. Why: PINs follow bank accounts. Also, deactivate old PINs.
  • Map and reconcile each payroll earning and deduction category to the general ledger.
  • Alert Finance as employees max out on the Social Security taxable wage base and state unemployment/disability wage bases.
  • Add up employees’ supplemental pay to see if they’re close to the $1 million mark.
    Reminder: Disregard W-4s and withhold at the highest personal income tax rate for all
    subsequent supplemental pay.
  • Begin gathering employees’ consents to electronic delivery of their W-2 forms and 1095 forms.
  • Sweep your payroll system clean of Individual Taxpayer Identification Numbers (ITINs). The IRS provides ITINs to aliens for tax purposes unrelated to work; employees always have SSNs.
  • Scan undeliverable W-2s and the postmarked envelopes, and shred the paper copies. Note:Be sure IRS auditors can read the scanned forms.
  • Have your IT department test the payroll system for employees’ names/SSNs, W-4s, ghost employees, and withholding on taxable fringe benefits.
  • Purge the master file of terminated employees.
  • Perform a manual test run and physically hand out paychecks; this also checks for ghost employees.
  • Compile a list of taxable fringes (e.g., personal use of home computers, or company cars), and decide how they will be recorded in the general ledger. Review lock-in letters for employees who terminated or who didn’t return to work within 12 months of a bona fide leave; return those letters to the IRS.
  • Remind employees to notify you if they change direct-deposit-linked bank accounts.
  • Evaluate the company’s vacation pay policy as it relates to final pay. Look for general
    promises to pay and forfeiture provisions. Research state law to see if forfeiture is allowed.
  • Count blank check stock and examine security procedures for signature stamps/plates.
  • Assess reimbursement policies to ensure that employees are properly substantiating their business expenses.
  • By August 1 file all W-2c forms with the SSA.
  • By August 10 (or the next business day, if August 10 is a non-business day), file your second-quarter 941 form, if you deposited the taxes for the quarter in full and on time.

September

  • Verify your deposit schedule for the next year. Monthly depositors deposit semiweekly during the next year if the total withheld income and FICA taxes of the four 941s filed for the last two quarters of the previous year and the first two quarters of the current year is more than $50,000 (e.g., for 2017, the last two quarters are the third and fourth quarter of 2015 and the first two quarters of 2016).
  • Check your filing schedule. Annual filers in the current year become quarterly filers in the next year if their total payroll liability exceeds $1,000.
  • Gather information on these non-corporate service providers for Form 1099-MISC purposes: auto mechanics for company cars, plumbers, electricians, computer and other consultants, copier repair people, and equipment/office lessors.
  • For calendar-year flexible spending plans that don’t have a 2½-month grace period, remind employees that amounts remaining in their accounts at the end of the year will be forfeited. Option: Employees can accelerate expenses into this year.

October

  • Order W-2 and W-3 forms (if needed) from the IRS for the current tax year.
  • Verify all employees’ names, SSNs, and addresses.
  • Review posting descriptions on non-recurring journal entries. Delegate this task to yourself if support staffs’ notations aren’t adequate.
  • Post employees’ benefit/payroll adjustment data. Include: relocation allowances,
    educational assistance, group-term life insurance, third-party paid sick pay, and manual and void checks.
  • Document gross-to-net calculations for manual checks; ensure that manual checks and voids are entered properly; review the general ledger accounts. This helps Accounting reconcile the payroll bank accounts.
  • Review facsimile signatures for Forms 941, 940, 945, and 944, and authorization letters from upper management.
  • Form 944 filers who will remit payroll taxes with their forms should register for the IRS’s Electronic Federal Tax Payment System (EFTPS).
  • Confirm year-end payroll deadlines and final federal/state deposit dates.
  • For electronic W-2 filers, register with the Social Security Administration (SSA) for a PIN by surfing to www.ssa.gov/bso/bsowelcome.htm#wage and clicking on Registration.
  • Submit laser-printed substitute W-2 (Copy A) and W-3 forms to the SSA for approval; contact the SSA at copy.a.forms@ssa.gov.
  • Check deduction codes for employees making charitable donations through payroll deductions. If you choose, you can report those amounts in Box 14 of their W-2s.
  • Review the holiday processing schedule.
  • Update employees’ consents for electronic W-2s and 1095; also, check your e-delivery system.
  • Inquire whether other departments will need year-end reports from Payroll, and send memos to other departments thanking them for their timely input last year and reminding them that their cooperation will again be needed for this year. Examples: HR, Benefits, and Accounts Payable.
  • If personnel changes occurred in other departments, identify new people with whom you’ll be working. Prepare a memo detailing the information they must provide to you.
  • Identify new outsiders, such as third-party administrators and third-party payers of sick pay, with whom you’ll be working.
  • By October 31 (or the next business day, if October 31 is a non-business day), deposit FUTA tax, if it’s more than $500.

File your 941 form for the third quarter of the year (if you didn’t deposit taxes for the quarter in full and on time). Deposit any undeposited tax. You may pay taxes directly to the IRS with your form if your total tax liability for the current or preceding calendar quarter is less than $2,500.

Filers of annual Form 944 deposit taxes withheld during the third quarter, if the total withheld is less than $2,500.

Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year

Claim your FREE copy of Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year!

PRINT TO PDF

November

  • Mark November 1 or any later date as the cut-off if you use the special accounting rule for non-cash fringe benefits.
  • Test computer programs for W-2 forms that are due next year.
  • If you print your own W-2s, review the specifications in IRS Pub. 1141. Test your computerized paper forms processes for W-2 forms that are due next year. Shred sample forms before disposing of them.
  • Right after you file your third-quarter 941 form, compare the 941 totals with your payroll records for the year. Pinpoint any over- or underreporting of income, and adjust any overpayment or underpayment of taxes on your fourth-quarter 941 form.
  • Note the next year’s Social Security taxable wage base, withholding allowances, and income tax withholding tables.
  • Schedule special year-end reports to/from other departments.
  • Send memos to employees showing the next year’s paydays, the new Social Security taxable wage base, 401(k) pre-tax limit, and state unemployment/disability wage bases, if applicable.
  • Make new folders for the next year.
  • Reconcile your tax register, making sure all the numbers balance.
  • Decide on the affordability safe harbor you will use for Form 1095-C reporting purposes.
  • By November 10 (or the next business day, if November 10 is a non-business day), file your third-quarter 941 form, if you deposited the taxes for the quarter in full and on time.
  • By November 30, remind employees to submit a new W-4 if their withholding allowances have changed or will change for the next year.

December

  • Notify employees if you’re not withholding on their personal use of company cars or are using the special accounting rule to value non-cash fringe benefits.
  • Calculate the imputed income for group-term life insurance over $50,000, loans with below market interest rates, and personal use of a company car.
  • If vacation isn’t allocated on a calendar-year basis, check that employees’ vacation balances aren’t re-set to zero with the first payroll of the new year.
  • Research outstanding checks that are older than 30 days; post unclaimed checks to an unclaimed earnings account.
  • Distribute the next year’s W-4 forms to employees. Employees whose family status changed, or those who claimed an exemption from income tax withholding in the current year, must file new forms; everyone else may refile.
  • Cut manual checks for employees fired before the first payroll of the next year.
  • Conduct a final review of the general ledger for “hidden” wages, notably non-cash fringes.
  • Reconcile bank accounts through November; ask the bank to prepare an early cut-off statement for December.
  • Go through a preliminary run of your W-2s to get the totals. Compare the W-2 totals to your 941 totals. Track any missing adjustments so you won’t have to issue a Form W-2c later on.
  • If you print W-2s, test the hardware and software to ensure that all the data appears in the correct boxes on the form. Rule of thumb: Have 125% of the forms you’ll actually need. The extra will account for forms used in tests, forms with mistakes, and duplicate forms your employees ask you to provide.
  • Let all interested parties (HR, MIS, Accounting) know the cut-off date for the previous year’s payroll and the first payroll for the new year.
  • Before processing the first payroll of the new year, make sure the new Social Security wage base, state unemployment and disability wage bases (if applicable), federal and state withholding allowances, federal and state tax rates, and employees’ benefits data are input into the system
  • Run payroll adjustments for year-to-date corrections and void and manual payroll checks.
  • Back up your system before processing the first payroll of the new year.
  • Inform your service bureau of your W-2 schedule, and any changes for the coming year, including employees’ benefits deductions and new W-4s.

At the Start of Each Health Benefit Plan Year

  • Note the monthly premium for the lowest cost plan for self-only coverage.
  • Record employees’ dependents Social Security numbers.
  • Record employees’ health benefit selections.
  • Retain signed and dated waivers of coverage from full-time employees who decline the offer of coverage.
  • Calculate the amount of employer flex credits and HRA amounts employees may use to pay their monthly premiums.
  • Record the beginning and ending dates of ongoing employees’ standard measurement period, administrative period, and stability period.
  • Retain information regarding whether coverage was offered to at least 95% of full-time employees and their dependents.

For New Employees

  • Verify the work eligibility of each new employee and complete Form I-9, Employment Eligibility Verification.
  • Record employees’ names and Social Security numbers from their Social Security cards.
  • Ask employees for federal W-4 forms and state W-4 forms, as necessary.
  • Verify that employees’ names and Social Security numbers are correct by using the Social Security Administration’s (SSA) Social Security Number Verification Service.
  • Report new hires to the appropriate state agency.
  • Provide new employees with a schedule of paydays and voluntary deductions.
  • Enroll new employees in direct deposit or a paycard program, provide the appropriate explanatory materials.
  • For variable hour and part-time employees, note the beginning and ending dates of their initial measurement periods.
  • For employees whom you expect to work full time, offer group health benefits by the first day of the fourth full month of their employment.

For Employees in the Military

  • Plan ahead for employees who complete their annual service in the National Guard and Reserves by asking them to tell you when their military leave starts and ends.
  • Employees temporarily away on military duty can, but aren’t required to, use accrued vacation for military leave. In all cases, withhold taxes on vacation payments made to reservists, and on the value of time donated to reservists by co-workers.
  • Withhold income and FICA taxes from military differential payments made to employees who are absent for up to 30 days while serving in the National Guard.
  • Withhold income taxes, but not FICA taxes, from military differential pay if employees are called to active duty for longer than 30 days. You may treat the pay as supplemental wages.
  • If your cafeteria plan allows, employees who are on military duty for at least 180 days or indefinitely may take qualified reservist distributions from their health flexible spending accounts; these distributions are fully taxable.
  • Reservists may request distributions of their 401(k) pre-tax deferral amounts, if their call to active military service is for 180 days or longer, or for an indefinite period. Distributions begin on the date they receive their orders and end at the close of their active military service.
  • Non-seniority benefits (e.g., health benefits) provided to employees on military leave must match benefits provided to employees on non-military leave. If leave is for 31 or fewer days, you can’t charge reservists more than the regular amount paid by active employees. Idea: Allow employees to pre-pay.
  • Check that the accrual rate for employees’ seniority-based benefits includes all the time they spend on military leave. Example: If vacation increases from two to three weeks after five years, military service counts when determining when that threshold is met.
  • Determine reservists’ FMLA eligibility by counting the months and hours they would have worked, but didn’t, due to military service.
  • Watch child support withholding for employees on military leave. If employees’ disposable pay decreases or they skip pay periods altogether due to military leave, notify the state child support office.
  • For longer periods of military leave, reservists and their dependents may elect COBRA-like benefits (i.e., benefits for 24 months at 102% of the premium). Warning: This applies to all employers, including small employers that aren’t covered under COBRA. For COBRAcovered employers, COBRA also applies.
  • Employers’ pension contributions continue during employees’ military leaves; returning employees must be allowed to make up contributions they missed while they were away.
  • Adjust 401(k) loan repayment schedules for employees on military leave. Options: Suspend the time they’re away when figuring the five-year payback period (but add the time back when they return), or lengthen the payback time to five years for shorter loans, and adjust the amount withheld accordingly. The maximum interest rate, which is 6%, continues to accrue during any suspension period.
Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year

Claim your FREE copy of Payroll Checklist: A step-by-step compliance guide to each pay period, month and calendar quarter of the year!

PRINT TO PDF