The year-end payroll checklist for contractors

Most of the year, a payroll run that is slightly wrong can be fixed on the next one. The last payroll of the year is different: once it is filed, the W-2s are built from it, and fixing anything afterwards means corrected returns, corrected W-2s and an employee asking why their numbers changed in February.

So the work is front-loaded. Everything below belongs in November and early December, before the final run — not in the last week of the year, when payroll providers are busy and your own crew is on holiday.

1. Check names, addresses and Social Security numbers

W-2s are matched against Social Security records by name and number. A mismatch generates a notice and, often, a refiling.

Before the last payroll, send every employee their name, address and the last four digits of the number you hold, and ask them to confirm. Married names, hyphenated names and a middle name that appears on one document and not another are the usual culprits. Addresses matter too — W-2s get mailed.

2. Get the taxable extras into payroll

This is the step contractors miss, because the money did not move through payroll when it was given.

Several things that feel like perks are treated as wages and have to be reported through payroll:

• Personal use of a company vehicle. A truck an employee drives home and uses at weekends has a personal-use portion. The method for valuing it is your CPA’s or payroll provider’s call, but the value belongs on the W-2.
• Bonuses, including cash. A bonus handed over in cash or by personal check is still wages. It goes through payroll, with withholding, like any other pay.
• Gift cards and cash-equivalent gifts. Generally treated as wages regardless of the amount.
• Certain allowances — tool, phone or truck allowances — depending on how your plan is set up and whether expenses are substantiated.
• Owner health insurance in an S-corp, which has its own reporting treatment for more-than-2% shareholders.

Ask your payroll provider and your CPA which of these apply to you, then get them into a payroll run before the last one. Added afterwards, they turn into corrections.

3. Reconcile payroll to the returns and to the books

Three sets of numbers should agree, and in most contractor books at least two of them do not:

1. Your payroll register for the year
2. The quarterly returns that were filed
3. The wage and payroll tax accounts in your general ledger

Work through them quarter by quarter. A difference is far easier to find in November across one quarter than in February across four. See you missed a payroll tax deposit if a deposit turns out to be missing — that is the one to deal with immediately rather than at year end.

4. Confirm who is filing what, and when

If a payroll provider files for you, confirm in writing which filings they handle: W-2s to employees and the Social Security Administration, the annual federal unemployment return, state unemployment, and any local filings. Then confirm the same for your subcontractor 1099s, which are often not included.

W-2s are due to employees and to the Social Security Administration by January 31. So are 1099-NECs to contractors. The two deadlines land on the same day, which is exactly why January is miserable for anyone who left both until then. See the 1099 deadline guide and who needs a 1099.

5. Classification: fix it before the W-2s, not after

Year end is when worker classification becomes visible, because the person who was treated as a subcontractor all year is about to receive a 1099 rather than a W-2.

If you have workers whose arrangement does not look much like independence — your schedule, your tools, your supervision, and no other customers — talk to your CPA now rather than discovering it in an audit. See 1099 or W-2.

6. Prevailing wage and certified payroll

If you ran public work this year, check that the certified payroll reports you filed agree with the payroll you actually ran, including fringe benefit treatment. Discrepancies between the two are found later, and they are expensive to unwind. See prevailing wage and certified payroll.

7. Line up the insurance audits

Workers’ compensation and general liability audits are built from payroll by classification code, plus payments to uninsured subcontractors. Both are easier when the payroll records are already reconciled and the certificates of insurance are on file.

Pull the sub certificates now and note which expired mid-year. See surviving your workers comp audit and the general liability insurance audit.

The short version

Related

• What your CPA needs from you at year end
• Questions to ask your CPA before December 31
• The contractor tax deadline calendar

General information, not tax or legal advice. Which items are treated as wages, and how they are valued, depends on your plan and your situation — confirm with your CPA and payroll provider.