Year-End Payroll Checklist

Year-end Payroll Checklist
What Benefits Need to Be Reported, Why They Matter, and What Your Accountant Needs From You
December 2025

As the year winds down, it’s time to gather key payroll details so your accountant can wrap up tax filings and prepare accurate W-2s. In particular, you’ll want to review any shareholder or owner health insurance benefits, personal use of company vehicles, group-term life insurance and third-party sick pay from the year. These items often affect taxable wages and withholding on W-2 forms. By collecting the right information now, you help your accountant report everything correctly (and avoid IRS notices later).

Shareholder Health Insurance

If you run an S corporation, remember that health insurance for more-than-2%-owner employees (shareholders) gets special tax treatment. Any premiums the company paid on behalf of a >2% shareholder must be added to that person’s wages for income-tax purposes. (By rule, these amounts go in Box 1 of the W-2, but they are not subject to Social Security/Medicare withholding.) In practice, this means the accountant needs the annual total of those premiums so it can be included in the owner’s taxable wages. For example, if you paid $6,000 in premiums for yourself as a 3% shareholder-employee, that $6,000 should appear on your W-2 (Box 1) as “wages.” The good news for the owner is that same $6,000 is deductible on the owner’s personal return (above-the-line deduction) if you meet the self-employed health insurance rules.

  • Why give this to the accountant? Your CPA will add the premium total to the shareholder’s W-2 wages (Box 1). This ensures the IRS knows about the benefit and that the owner can later deduct the premiums on their Form 1040.
  • Tip for partnerships/LLCs: Partnership owners don’t get W-2s. Instead, they should report health-insurance premiums as guaranteed payments or adjustments on Schedule K‑1. But you should still tell your accountant the total premiums paid for each partner so they can handle those entries correctly.

Personal Use of a Company Vehicle

If anyone (owner or employee) drove a company-owned car for personal reasons (including commuting), that use must be treated as taxable income. In simple terms, personal miles in a business vehicle are a fringe benefit added to wages. Your accountant will need mileage logs or other records to calculate the value. Typically you determine the fair-market value of personal use (using IRS methods like the lease-value rule or cents-per-mile) and include that amount in that person’s W-2 income and apply withholding.

  • What to track: Keep a mileage log all year. Record total miles versus personal miles for anyone driving a company car. (Apps or worksheets can help.)
  • Reporting: At year-end, give your accountant the vehicle(s) Fair Market Value(s), total miles, and personal miles per driver. The accountant can then compute and include the “personal use” value on each driver’s Form W-2. For example, if Jane drives a truck 30,000 miles in 2025 and 5,000 of those were personal, she must report the FMV of those 5,000 miles as income. The accountant will add that to her Box 1 (and Boxes 3/5) wages on the W-2.
  • Why it matters: Any personal-use benefit left out of payroll reporting becomes unreported income, and the IRS may adjust and disallow the truck expenses later. Providing the info now ensures correct withholding of income and employment taxes on the fringe benefit.

Group-Term Life Insurance

Group-term life insurance provided by an employer is tax-free only up to $50,000 of coverage per employee. Any coverage above $50,000 creates a taxable benefit equal to the imputed cost of the excess coverage. In practice, the employer calculates the cost of life insurance over $50K (using IRS tables) and adds that amount to the employee’s wages. The accountant will need the total coverage amounts and premiums for each employee to do this.

  • Employee coverage: Tell your accountant if any employee had more than $50K of company-purchased life insurance. For example, if you provided $100K of coverage on Alice, the cost of the extra $50K will go on her W-2 Box 1 as taxable income (often entered in Box 12 with Code “C”). The accountant can use IRS tables to convert excess coverage to a dollar amount.
  • S-Corp owners: Note a special rule for S corporations: 2% shareholder-employees do not get the $50K exclusion. In other words, 2%-owner shareholders owe tax on the entire premium value of any group term life coverage, not just excess. So if a shareholder owns $50K of coverage, the whole cost is a taxable fringe benefit on the W-2. Be sure to provide the full premium paid for each 2%-owner so the accountant can include it all in wages.
  • Why share this? The goal is accurate W-2 wages. If the accountant doesn’t know about extra life insurance coverage, employees could under-report income. By giving the premium details (and noting who is a >2% shareholder), your accountant can correctly report any imputed income and withhold taxes. This keeps you in line with IRS rules.

Third-Party Sick Pay

“Third-party sick pay” refers to sick/disability benefits paid to your employees by an outside party (like an insurance company) instead of by the employer. For example, if an employee has short-term disability insurance and the insurer pays the wages while they’re out sick, that’s third-party sick pay. The IRS still treats it as wages – but it’s reported a bit differently.

  • What to gather: The insurance company will send documents related to the claims, typically throughout the year as the claim is paid and a summary at the end of the year. The accountant needs copies of all letters and the detailed information provided for each employee who received the benefit during the year to get it properly recorded.
  • Reporting responsibility: Either the insurance company or the employer will file these W-2s for the sick pay (it depends on your arrangement). Under IRS rules, all third-party sick pay is reported on W-2s (Box 12 with Code J) rather than Box 1. Meanwhile, the employer and insurer must coordinate on Forms 941 and Form 8922. For instance, if the insurer issues W-2s, you will file Form 8922 (Third-Party Sick Pay Recap) after year-end to reconcile those W-2s.
  • Why your accountant needs this: Third-party sick pay can affect both income tax and FICA/FUTA reporting. By year-end, your accountant must know who got sick pay and how much, so they can make any necessary payroll adjustments. For example, if an employee’s sick pay was partially taxable (if they contributed to the plan), the accountant needs that breakdown to handle withholding. Providing the insurer’s W-2 info and knowing whether the employer or insurer filed the taxes lets your accountant complete accurate W-2s and Form 8922 filings.

Getting Organized

As you wrap up the year, compile any documents related to these items and share them with your payroll/accounting team. This might include insurance invoices, vehicle logs, life-insurance policy details, or insurance-provider statements. A quick checklist:

  • Health insurance premiums paid for owners (>2% S-corp owners).
  • Mileage logs for company cars showing personal vs. business miles.
  • Life insurance coverage amounts for any employees or owners, and total premiums paid.
  • Any third-party sick/disability payments made to employees (and related W-2s).

Year-end payroll can feel like a lot, especially when these special fringe-benefit items come into play. But you don’t have to sort through it alone. Our payroll team is here to help. Getting these details right now helps keep your payroll smooth, your W-2s correct, and your tax season stress-free.