The final payroll of 2026 may be weeks away, but many of the mistakes that can complicate year-end have already happened.
A missed timecard, an outdated address for a former employee or a bonus that never reached payroll may look like isolated administrative problems when they occur. At year-end, however, those small problems can converge just as employers are reconciling wages and taxes, preparing Forms W-2 and shifting payroll systems to new rates and limits for 2027.
That accumulation of small errors is one of the biggest year-end risks for smaller employers, according to John Waldmann, founder and CEO of Homebase, a workforce management and payroll company focused on small businesses.
“In a small business, payroll usually falls on the shoulders of one person,” Waldmann said in an interview with Checkpoint News. “The end of year tends to be the time where the accumulation of small mistakes, paper cuts, things like that can really come back to bite you.”
The timing is significant for payroll professionals. The Social Security Administration has set the 2027 Social Security taxable wage base at $192,300, up from $184,500 for 2026. The employee and employer OASDI rate remains 6.2%, producing a maximum 2027 contribution of $11,922.60 for each on wages at or above the taxable maximum.
But changing a wage base in a payroll system is the comparatively easy part. Employers entering year-end also must make sure the underlying wages and employment data feeding those systems are right.
Start with the payroll data
Asked what five checks he would prioritize before an employer’s final payroll, Waldmann started with the fundamentals: employee names, Social Security numbers, and addresses, including information for workers who left during 2026.
That recommendation aligns with IRS guidance. IRS Publication 15 specifically addresses correctly recording an employee’s name and Social Security number, while the IRS’s 2026 Form W-2 instructions identify SSNs and correcting wage reports among employers’ year-end reporting considerations.
For Waldmann, however, the review should go well beyond demographics.
Employers should reconcile year-to-date wages and taxes with quarterly filings, verify the hours and overtime supporting payroll, review tips and other variable compensation, and identify bonuses and taxable gifts that need to make their way into payroll.
The goal is to find discrepancies while employers still have room to investigate them.
“The clearest sign that you may not be as prepared as you want is the amount of time that you spend every payroll cycle preparing for payroll,” Waldmann said. Repeated timecard cleanups, edited entries, and employee-document corrections, he added, can indicate that “there’s probably some stuff that slipped through the cracks.”
That observation gives payroll departments a useful year-end metric that does not appear on a tax return: How much manual intervention does an ordinary payroll require?
A process requiring repeated corrections throughout the year may warrant more scrutiny before year-end reporting begins.
Holiday bonuses and gifts can create payroll consequences
Holiday compensation deserves particular attention because not everything an employer thinks of as a “gift” can simply remain outside payroll.
IRS Publication 15-B governs the treatment of fringe benefits and explains the rules for determining when benefits are taxable and how taxable fringes are withheld, deposited and reported. IRS Publication 15 separately addresses wages and other compensation, fringe benefits and supplemental wages.
“Don’t forget that bonuses, cash gifts, gift cards should be run through payroll as wages,” Waldmann said.
The distinction becomes more complicated under wage-and-hour law because the tax treatment of a payment and its treatment for overtime purposes are separate questions.
For nonexempt workers, the Fair Labor Standards Act (FLSA) generally requires overtime of at least one and one-half times the employee’s regular rate for hours exceeding 40 in a workweek. The Department of Labor says compensation for hours worked, services or performance generally enters the regular rate unless it qualifies for a statutory exclusion.
That makes the character of a year-end bonus important. A genuinely discretionary bonus can be excluded from the FLSA regular rate, but a bonus is discretionary only if the statutory requirements described by the Labor Department are satisfied, including that the employer retain discretion over whether to make the payment and its amount until at or near the end of the relevant period.
If a bonus belongs in the regular rate but its amount cannot be determined until later, federal regulations may require the employer to allocate the bonus back to the workweeks in which it was earned and pay additional overtime for applicable weeks (29 CFR §778.209)
That is one reason identifying variable compensation before payroll closes can prevent a tax-reporting issue from becoming a wage-and-hour correction as well.
Hourly workers add another layer to the year-end review
The potential pressure points multiply for employers with hourly workforces.
Waldmann pointed specifically to timecards, tips and employees working in multiple roles or locations at different wage rates.
That last category can become particularly important when overtime is involved.
Under the FLSA, when an employee performs two or more types of work at different straight-time rates during the same workweek, the regular rate is generally calculated using the weighted average of those rates. Earnings from the rates are added together and divided by the total hours worked at all jobs, the Labor Department explains.
Tips bring their own compliance rules. The FLSA permits an employer meeting the applicable requirements to take a tip credit toward minimum-wage and overtime obligations, and federal regulations separately address tip-credit conditions, tip pools, dual jobs, records for tipped employees and overtime calculations.
For overtime, a tipped employee’s regular rate includes the tip credit taken by the employer, along with cash wages and other remuneration that must be included under the FLSA. Tips received beyond the tip credit generally need not be included in that regular rate (29 CFR §531.60).
For payroll, then, Waldmann’s suggestion to compare payroll runs against time and tip records can function as more than an accounting reconciliation. It can reveal whether the inputs underlying wage-and-hour calculations deserve another look.
Fixing employee records before W-2s can save a January correction
Some payroll mistakes are inconvenient in October. They can become considerably more disruptive after Forms W-2 are created.
Waldmann returned several times to former employees, particularly their contact information.
Employees who no longer appear in normal HR workflows still need accurate wage statements. The IRS requires employers to file Form W-2 for employees meeting the applicable reporting requirements, and Form W-2 reports wages, tips and other compensation along with applicable federal income and FICA taxes.
Once an inaccurate W-2 has been issued, employers may be dealing with the correction process, including Forms W-2c and W-3c. The IRS’s 2026 instructions include specific procedures for correcting wage reports.
“Remember that all of these things that you need to fix and then go to the payroll company to get reissued is going to have a cycle time,” Waldmann said. “Your employees are also working against tax deadlines in the new year.”
That makes October and November useful months for finding the errors that require input from someone else: an employee who needs to supply information, a manager who needs to resolve a time discrepancy, or another business function that has not yet reported compensation.
“The things that’s dangerous to leave until December is all the stuff that takes a little bit of lead time to go fix,” Waldmann said.
Technology can catch errors, but payroll still needs judgment
Waldmann sees technology as central to reducing the manual work that produces year-end cleanup, particularly for small employers.
But automation does not eliminate management’s need to understand what the payroll data is saying.
Technology and AI-assisted systems should handle repetitive functions such as detecting missing timecards and identifying anomalies, Waldmann said. The more valuable role for payroll professionals can then shift toward examining patterns and deciding what requires attention.
“You should expect your tool to be able to generate those basic insights around kind of where is overtime coming from,” he said. “What is the variability in my payroll runs? What’s driving that?”
That distinction becomes especially important in compliance. A system can identify an unusual payroll result, but an employer may still need to determine why it happened and whether the underlying practice complies with federal, state and local law.
For example, repeated overtime in one location could be a staffing or scheduling matter. Repeated adjustments to timecards might raise a different set of questions. An employee routinely working under several rates could warrant a review of the employer’s regular-rate calculation.
In other words, automation can surface the exception. Payroll expertise is still needed to interpret it.
The 2027 transition starts before 2026 closes
Year-end also creates a sometimes-overlooked problem: employers are simultaneously closing one tax year and configuring another.
The SSA’s new $192,300 taxable maximum illustrates the transition. For 2026, IRS Publication 15 specifies a Social Security wage base of $184,500 and a 6.2% tax rate for both employer and employee. For earnings in 2027, SSA says the taxable maximum becomes $192,300 while the 6.2% rate remains in place.
Employers also need to monitor new state and local minimum wages and other employment-law changes taking effect with the calendar year, Waldmann said.
Because those changes can vary significantly by jurisdiction, payroll professionals should not treat “2027 configuration” as a single nationwide update.
For 2026 reporting itself, there are also new considerations. IRS instructions note that the 2026 Form W-2 was changed in connection with provisions of P.L. 119-21, including changes related to qualified tips and qualified overtime, with Box 14 divided into Boxes 14a and 14b and Box 14b created for Treasury Tipped Occupation Codes.
For employers with tipped and hourly workers, that puts some of the very data Waldmann says deserves operational scrutiny into the year-end reporting spotlight as well.
Turn year-end cleanup into a 2027 control
Perhaps the more consequential year-end question comes after the reconciliation is finished.
What happens to everything payroll learned from it?
Waldmann recommended employers conduct a retrospective rather than treating the successful completion of Forms W-2 as the end of the process.
“The problems you fixed in December in advance of running, being getting ready for end of year, are probably the same things that you’ll deal with next December if you don’t do anything differently,” he said.
That creates a different way to evaluate year-end success.
A corrected timecard resolves one employee’s wages. Finding out why the timecard was wrong may improve an entire process. Correcting an employee’s wage rate repairs today’s payroll. Determining why the wrong rate entered the system can prevent the same problem from affecting the next one.
Waldmann’s advice is therefore to give year-end problems an afterlife: identify what failed, determine whether it was an isolated error or a process weakness and adjust the workflow before another year’s worth of transactions accumulates.
“The end-of-year problems are really just paying the quote-unquote tax bill of the problems and issues from earlier in the year,” he said. “It’s better to catch those things over the course of the year.”
5 key takeaways
- Start with employee data. Verify names, Social Security numbers and addresses, including information for former employees, before W-2 preparation gets underway. IRS guidance expressly emphasizes correctly recording employee names and SSNs.
- Reconcile the payroll behind the forms. Compare year-to-date payroll information with quarterly reporting and review timecards, overtime, tips and other variable compensation rather than waiting for the W-2 process to expose discrepancies.
- Give bonuses a payroll and FLSA review. Taxable compensation needs appropriate payroll treatment, while nondiscretionary bonuses can also affect an employee’s FLSA regular rate and potentially require additional overtime calculations.
- Pay particular attention to hourly employees. Tips, multiple jobs or wage rates, and overtime involve rules that can turn inaccurate time or pay data into compliance issues. The FLSA generally uses a weighted-average regular rate when an employee works at multiple straight-time rates in a workweek.
- Make year-end a process review, not just a deadline. The most valuable question after correcting a payroll problem may be why it occurred. Automation can reduce repetitive work, but payroll professionals still need to evaluate exceptions, compliance risks and recurring weaknesses before they follow the organization into 2027.
