Top Payroll Pitfalls to Avoid Before Year End

As we approach the end of 2025, payroll teams are deep into year-end preparation. Balancing open enrollment, PTO tracking, final pay runs, year-end bonuses and compliance updates…to name just a few. With all of these important management obligations, it’s easy to overlook critical details that can lead to costly mistakes.

To help you close the year with confidence, we’ve outlined the top payroll pitfalls to avoid before December 31st, plus tips to help you stay compliant, accurate, and audit-ready.

1. Missing Year-End Deadlines

Deadlines for W-2s, 1099s, and tax filings sneak up fast. Missing these can result in penalties, employee frustration, and extra stress in January.

Avoid it by:

• Creating a year-end payroll calendar.
• Verifying IRS and state-specific filing deadlines now.
• Setting internal cutoffs for final payroll changes and adjustments.

2. Incorrect Employee Classification

Misclassifying employees as independent contractors (or vice versa) is a red flag for the IRS and Department of Labor. It can trigger audits, fines, and back pay liabilities.

Avoid it by:

• Reviewing job roles, contracts, and control over work.
• Re-auditing any 1099 vs. W-2 workers for accuracy.
• Consulting with your HR or legal team if roles have changed.

3. Not Verifying Employee Data Before W-2s Go Out

Incorrect names, addresses, or Social Security numbers can delay tax filing and cause frustration for employees.

Avoid it by:

• Running a report to verify employee data.
• Asking employees to confirm their personal info in your self-service portal.
• Checking for formatting errors (especially with SSNs and addresses).

4. Forgetting to Process Year-End Bonuses or Fringe Benefits Correctly

Year-end bonuses, gift cards, relocation assistance, and company perks must be taxed appropriately. Missing this can skew tax documents and underreport earnings.

Avoid it by:

• Coordinating bonus payout schedules in advance.
• Understanding which fringe benefits are taxable.
• Running a final audit of “off-cycle” compensation types.

5. Mishandling PTO Payouts or Carryovers

Many companies have “Use it or Lose it” PTO policies or allow carryover into the new year. Mishandling these balances can damage employee trust or violate state laws.

Avoid it by:

• Reviewing state-specific PTO rules (some prohibit “Use it or Lose it”).
• Communicating clearly to employees about deadlines and policies.
• Making sure any PTO cash outs are properly taxed.

6. Skipping Payroll Reconciliations

If your payroll isn’t reconciling with your general ledger, benefits deductions, or tax deposits, you could be carrying hidden liabilities into 2026.

Avoid it by:

• Reconciling gross-to-net payroll reports monthly.
• Matching benefits deductions with provider invoices.
• Double-checking your final quarterly and annual filings (941s, W-2s, 940s).

6. Skipping Payroll Reconciliations

Applicable Large Employers (ALEs) must file 1095-Cs by early 2026 for the 2025 tax year. Missing this can mean significant penalties.

Avoid it by:

• Tracking full-time equivalents accurately throughout the year.
• Ensuring your HRIS or payroll system is ACA-reporting ready.
• Connecting with your benefits administrator before the holidays

Final Tips: How to Stay Ahead

• Run a mock W-2 report: Identify errors before they go out.
• Automate where you can: Use integrations to sync payroll, benefits, and timekeeping.
• Lean on your provider: If you’re using a full-service payroll company (like us), let us help you avoid these issues.

Let’s Close 2025 Strong

Year-end can be stressful, but it doesn’t have to be chaotic. With the right strategy and a reliable payroll partner such as Payentry, you can finish Q425 with clean records, compliant filings, and happy employees.

Want help navigating your year-end payroll checklist? Contact us to learn how we can simplify it for you.

Let’s Talk. Our personnel management professionals provide expert support in payroll, workforce management, human resources, benefits administration, and retirement planning services.

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* MPAY LLC dba Payentry (Company), is not a law firm. This article is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other Company materials does not create an attorney-client relationship. The Company is not responsible for any inadvertent errors that may occur in the publishing process.