Year-End Payroll Guide

Processing bonuses alongside your regular payroll is an option, but if you prefer distinct entries or if the bonus payments need to be dated differently from your routine payroll dates, they must be handled separately.

When preparing to issue bonus checks, please clearly define the taxation for these bonuses and any other deductions that should be applied. Should there be any uncertainties regarding the taxation of bonus checks, it is advisable to consult with your accountant before submitting the information for processing. For those who require separate bonus payroll processing, it's important to coordinate with your payroll specialist at least three business days in advance of the intended bonus distribution date.

To guarantee prompt processing of bonus payrolls and to avoid delays, we encourage early initiation of bonus payroll submissions, ideally three days before the planned check date. Please be aware that if your tax liability from bonuses amounts to over $100,000, the IRS mandates that the amount be due the next business day following the check date. Consequently, you will need to wire the funds to us on the day of processing to comply with this requirement.

Please note the timing of payment: If an employee is compensated in the subsequent year for work completed in the current year, the earnings and deductions will be recorded in the year of payment. Payroll taxes are determined by the payment date rather than the work date. This is a crucial consideration for accurate tax reporting.

W-2s & 1099s - Delivery

These will begin shipping on January 20, 2026. If you’d like to pick up your tax forms from our office, please notify us by January 3rd. Otherwise, depending on the number of forms, deliveries will take place via USPS or UPS.

ACA Reporting

If an employer has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year (2024), the employer is an ALE (Applicable Large Employer) for the current calendar year (2025). ALEs must report certain health insurance information to the IRS via forms 1094-C and 1095-C. 

The deadline to distribute 1095-C forms to full-time employees who worked in 2025 is March 2, 2026.

Third-Party Sick Pay Reporting

According to the law, your insurance company has until January 15th to inform you about any disability insurance benefits that were paid to your employees during 2025. If you receive such a notification after submitting your last payroll for the year, please contact us. 

It's important to note that third-party sick pay can impact all fourth-quarter and year-end returns, including W-2 forms. Therefore, if sick pay is reported after the cutoff date for year-end information (Friday, January 03, 2026), the processing of your returns may be delayed.

Managing Taxable Fringe Benefits

It's important to include the value of personal use of company cars or any other taxable cash or non-cash benefit on Form W-2. Please make sure to report these benefits before the last payroll for the year. By reporting them together with cash wages, the appropriate withholding taxes can be deducted from the employee's check. 

If you pay any part of an employee's income tax or FICA withholding, the amount paid must be reported as additional taxable wages for the employee. Additional employment taxes, both employee and employer portions, must be withheld on this added income. 

To provide more specific information about several types of benefits, please refer to the following:

Group-Term Life Insurance 

Please ensure that you report the value of your group-term life insurance that exceeds $50,000 before your last payroll of the year. The value of the coverage is determined based on an IRS-published table that assigns a value for each $1,000 of excess coverage per month, based on the employee's age. If you are unsure about how to calculate the value of your coverage, we suggest you seek assistance from your accountant.

Dependent Care Assistance 

Employers must include the amount of dependent care benefits paid or incurred for the employee in Box 10 (Dependent Care Benefits) on Form W-2. 

This includes any amount exceeding the $5,000 exclusion ($2,500 if married filing separately). If you provided dependent care services to employees as part of an employer-sponsored program before the last payroll of the year, you should report the benefits paid or furnished. 

Educational Assistance Program 

The exclusion for employer-provided educational assistance under a qualified Section 127 plan for 2025 is: 

• Non-job-related undergraduate and graduate courses are exempt up to $5,250.
• All job-related education assistance reimbursements are exempt from withholding and employer taxes if they qualify as a working condition fringe benefit. 

If you haven't reported these reimbursements with your payroll yet, please do so before your final payroll of the year.

Health and Accident Insurance Premiums Paid by an S Corporation 

When an S-corporation pays health and accident insurance premiums for 2% shareholder/employees, the IRS specifies two tax treatments:

Situation 1 – Non-Discriminatory Plan 

If premiums are paid for a group of employees and dependents, the following will apply: 

• The premiums are treated as exempt for FICA and FUTA. 
• The premiums are included in the shareholder/employee’s federal gross income. 
• The premiums are reported on Form W-2 in Box 1 (Wages, Tips, Other Compensation). 

Situation 2 – Discriminatory Plan 

If the premiums are not paid under such a plan, the following will occur: 

• The premiums are treated like normal compensation and as such are subject to FICA and FUTA. 
• The premiums are included in the shareholder/employee’s gross income. 
• The premiums are reported on Form W-2 in the following boxes: 
  • Box 1, Wages, Tips, Other Compensation. 
  • Box 3, Social Security wages. 
  • Box 5, Medicare Wages and Tips. 

If you paid premiums for any shareholder/employee, report amounts and plan type before year-end payroll.