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Year-end payroll compliance is one of the most important responsibilities for small business owners, especially those operating as S corporations. The final weeks of the year determine whether your payroll, retirement contributions, and tax reporting are fully compliant with IRS rules—and whether you maximize available tax savings.
If you want to avoid unnecessary IRS scrutiny and ensure your year-end payroll filings are complete, this guide provides a clear checklist tailored for small business owners and S corp shareholders.
1. Verify Reasonable Compensation for S Corporation Owners
One of the most commonly scrutinized areas in S corporation payroll compliance is reasonable compensation.
The IRS requires S corp owners to pay themselves a fair salary that reflects the services they provide before taking distributions.
If you are unsure how much reasonable compensation you should take, Reasonable Compensation Calculated provides audit-defensible reports using IRS factors, industry benchmarks, and time/value analysis.
2. Review Year-End Salary Needs for Retirement Plan Contributions
Your year-end salary directly affects how much you can contribute to tax-advantaged retirement plans. Small business owners often overlook this step until it’s too late.
SEP IRA Contribution Requirements
- SEP contributions are limited to 25% of compensation.
- If you want to maximize your deduction, your salary must support your desired contribution.
Solo 401(k) Contribution Deadlines
A Solo 401(k) offers two types of contributions:
- Employee elective deferrals
- Employer contributions (25% of compensation)
Critical Solo 401(k) deadlines for SEO search intent:
- S corp owners: Employee deferral election and deposit must be completed by December 31.
- Sole proprietors: Must sign a written deferral election by December 31, but may deposit by the tax filing deadline.
- Plan setup deadline: To make employee contributions for 2025, the Solo 401(k) must be established by December 31, 2025.
Source: IRS Publication 560, Retirement Plans for Small Business.
3. Maximize Your 401(k) Contributions for 2025
If you already have a 401(k) plan in place, double-check your contribution limits and payroll setup before year-end. Many small business owners unintentionally underfund their accounts.
2025 401(k) Contribution Limits
- Employee deferral: $23,500
- Catch-up (age 50+): $7,500
- Total combined limit: $69,000, or $76,500 if age 50+
Optimizing your retirement contributions is one of the most effective year-end tax planning strategies and improves long-term financial outcomes.
4. Report Self-Employed Health Insurance (SEHIP) on Your W-2
For S corporation owners, health insurance premiums must be included as taxable wages on your W-2 to qualify for the self-employed health insurance deduction on the corporate return.
If SEHIP is not added to your W-2:
- You lose the deduction, and
- The error may cause IRS compliance issues during return processing.
5. Process Year-End Bonuses Correctly Under IRS Rules
If you plan to issue bonuses, they must be processed through payroll. The IRS classifies bonuses as taxable supplemental wages, meaning:
- They must run through payroll
- They must be included on the employee’s W-2
- Cash bonuses or off-the-books payments violate payroll compliance rules
Source: IRS Publication 15 Employer's Tax Guide Section 7 Supplemental Wages
Conclusion: Final Year-End Payroll Compliance Check for S Corporations and Small Business Owners
Completing your year-end payroll tasks correctly strengthens your tax position, reduces audit exposure, and ensures you comply with IRS requirements for S corporations and small businesses.
If you need help determining reasonable compensation before finalizing payroll, visit Reasonable Compensation Calculated for accurate, audit-defensible reporting tailored to your business.
