As a small business owner in Chicago, December brings more than holiday festivities — it's time to prepare your payroll for year-end compliance. Beyond preparing W-2s and 1099 forms for the IRS, you need a systematic approach to close out the current year and set up your business for success in 2026. Need some extra guidance? Lewis.cpa helps Chicago small businesses streamline their year-end payroll process, ensuring accuracy and compliance with federal and local regulations.
Phase 1: December Preparation Tasks (Before Your Final Payroll)
Complete these steps before processing your last paycheck of 2025 to avoid last-minute complications.
Step 1: Review and Update All Tax Forms You'll Need
You must provide employees with Form W-2 and contractors with Form 1099-NEC by January 31, 2026. You'll also submit reports to the IRS and Social Security Administration. Here's what you need:
While payroll software simplifies many tasks, these year-end forms have specific deadlines, so it’s important to pay careful attention. Keep records current throughout the year to make tax season manageable.
Step 2: Run and Audit Your Year-End Payroll Reports
Your year-end process should start well before your final paycheck of 2025. Generate these reports to verify accuracy and identify potential issues:
- Employee summary reports: Review tax withholdings, deductions, and wages for every worker you paid in 2025.
- Payroll summary report: Run this for January 1 through December 31, 2025. It captures gross wages, net pay, tax withholdings, and all deductions.
- PTO report: Prevent scheduling conflicts by reviewing paid time off balances and accrued hours for each employee.
- Retirement contributions: Document all employee and employer contributions to retirement accounts to plan for 2026 adjustments.
- Workers' compensation report: Your insurance provider may request this information to calculate 2026 premiums.
Step 3: Verify Your Company Information
With accurate business records, you can prevent processing delays and penalties. Confirm the following:
- Federal and state Employer Identification Numbers (EIN)
- Business legal name and mailing address
- State unemployment insurance account number
- Tax registration details at the federal and state levels
Step 4: Confirm Employee and Contractor Information
Errors in worker data create problems with the IRS and SSA. Verify the following details for each person:
- Full legal name (matching their Social Security card)
- Accurate Social Security Number
- Current mailing address
- Work location and tax jurisdiction
For contractors receiving 1099-NEC forms, confirm their W-9 information is current and accurate. If corrections are needed, notify your payroll service immediately to avoid penalties.
Step 5: Plan Year-End Bonuses Strategically
Bonus payments may qualify as tax-deductible expenses, but timing is key. Your accounting method determines when you can claim the deduction:
- Cash basis: Deduct bonuses in the year you pay them.
- Accrual basis: You may deduct bonuses in 2025 if paid within the first 2.5 months of 2026 (by March 15, 2026).
⚠️ Special rules apply to shareholder-employees in S corporations and owner-employees in C corporations. Contact Lewis.cpa, and we can help you determine the optimal payment timing for your situation.
Step 6: Set 2026 Compensation Rates
When planning salary increases for 2026, factor in payroll taxes and total compensation costs. Here are some key considerations:
- The Social Security wage base for 2026 is $176,100 (subject to annual adjustment).
- The employer portion remains 6.2% of wages up to this limit.
- Chicago Minimum Wage: As of July 1, 2025, Chicago's minimum wage is $16.20 per hour for most employers. Monitor updates for any 2026 increases that typically take effect July 1.
- Illinois Paid Leave for All Workers Act requires employers to provide paid leave, so ensure your 2026 compensation structure complies with state and local requirements.
Step 7: Notify Employees About Expiring Benefits
Help your team maximize their benefits before the year ends.
Paid Time Off (PTO): If your policy includes a January reset, inform employees of unused hours that will expire. Clarify whether unused PTO carries over or pays out.
Flexible Spending Accounts (FSA): Medical and dependent care FSAs usually have "use-it-or-lose-it" provisions. Remind employees to review their balances and submit eligible expenses before December 31, 2025.
Step 8: Record and Verify All Processed Paychecks
Before finalizing your year-end numbers, review every pay period in 2025. Confirm accuracy for the following:
- Employee wages and salary payments
- Benefit deductions (health insurance, retirement contributions)
- Child support withholdings
- Disability insurance payments
- Tax exemptions and credits
- Any deferred Social Security taxes from prior pandemic-related legislation
The IRS keeps a close eye on payroll tax compliance. Accurate records prevent audits and penalties.
Step 9: Order Required Tax Forms
Paper forms from the IRS typically take two weeks to arrive. If you file on paper, order W-2 and 1099 forms in early December. You can also file electronically through the IRS website to eliminate printing delays.
Forms 1095-B and 1095-C (for health insurance reporting) also require timely preparation. If submissions are late or inaccurate, they can carry significant penalties.
Step 10: Address Special Circumstances
Resolve these situations before December 31, 2025:
- New hires who haven't completed Form W-4
- Voided or reversed paychecks
- Active payroll disputes with current or former employees
- Pending classification reviews (employee vs. independent contractor)
If you cannot resolve these issues by year-end, document how they'll affect 2025 reporting and 2026 payroll processing.
Phase 2: January 2026 Reporting and Compliance
After processing your final 2025 paycheck, complete these year-end requirements before starting your 2026 payroll.
Distribute W-2 Forms to All Employees
Calculate each employee's annual wages and withholdings after your final 2025 pay period. Employees must receive their W-2 forms by January 31, 2026, either in print or through electronic access.
File Tax Forms and Remit Payments
Your filing obligations depend on your business structure, location, and size. Expect to submit:
- Annual business tax return (due March 15, 2026, for most business entities)
- W-2 and W-3 forms for all employees
- Form 940 for FUTA taxes
- Form 941 (quarterly) or Form 944 (annual)
- All due payroll tax payments
While personal income tax returns are due April 15, business returns typically have a March 15 deadline.
Review 2026 Minimum Wage and Labor Law Updates
Minimum wage rates change frequently at the state, county, and city levels. Many jurisdictions implement increases on January 1. Chicago and Illinois have specific requirements to keep in mind:
- Monitor Chicago minimum wage adjustments (historically updated July 1).
- Review Illinois Paid Leave for All Workers Act compliance requirements.
- Check Cook County and suburban municipality wage ordinances.
Account for these changes when setting 2026 compensation.
Establish Your 2026 Payroll Schedule
Map out all pay period end dates and payroll processing dates for 2026. Verify:
- No processing dates fall on weekends or federal holidays.
- Quarterly and year-end closing dates align with your accounting calendar.
- Time to adjust for any scheduling conflicts before setting up your payroll system.
Phase 3: Ongoing Planning and Risk Prevention
Risk is widespread, but you can protect your business by avoiding these frequent errors:
- Misclassification of workers: The IRS scrutinizes independent contractor classifications. Improperly classifying employees as contractors triggers penalties, back taxes, and interest.
- Unreported taxable compensation: Gift cards, awards, and certain bonuses count as taxable income. Failing to report these examples of taxable compensation creates compliance issues.
- Form 941 and W-3 mismatches: Your quarterly Form 941 totals must equal your annual W-3 summary. Discrepancies raise red flags with the IRS.
Further minimize your risk with a team of experts on your side. Lewis.cpa reviews your payroll structure to identify and correct these issues before they become problems.
Let Lewis.cpa Handle Your Year-End Payroll
Year-end payroll processing demands accuracy, attention to detail, and knowledge of current tax regulations. As a small business owner, you already have a lot on your plate; let our experts remove this stress. Our professional payroll services ensure compliance while freeing you to focus on your business.
Lewis.cpa serves small businesses in Chicago and nationwide with comprehensive payroll solutions. We stay current on Illinois and Chicago-specific requirements, including paid leave laws and minimum wage updates.
Contact us today to discuss your year-end payroll needs and start 2026 with confidence.
