2025 Year-End Payroll and Reporting Guide
Important Deadlines and New Reporting Rules for Overtime, Tips, and Vendors
To prepare for the 2025 year-end, business owners must prioritize recording health insurance premiums for S-Corp shareholders, tracking qualifying overtime and tips under the new OBBA rules, and securing W-9s for 1099 compliance. As the December 31 deadline approaches, it is critical to adjust payroll for fringe benefits—such as personal use of company vehicles and holiday bonuses—to ensure accurate W-2 reporting. Additionally, new electronic filing thresholds and specific rules for digital payments like Zelle and PayPal mean that proactive documentation is your best defense against significant IRS penalties.
Payroll Addbacks
As we near the close of another year, don’t forget about certain year-end payroll items that must be addressed before December 31. The following are examples of year-end wage adjustments to be included in an employee’s payroll before the close of 2025:
- Health insurance premiums paid on behalf of greater than 2% shareholders in S corporations. S corporations must include health insurance premiums, as well as HSA contributions paid on behalf of shareholders, on their W-2s in order for the shareholder to deduct these items on their individual income tax return. Generally, these amounts are not subject to Social Security and Medicare taxes or city tax.
- An income inclusion for the personal use of a company-provided vehicle. If you need assistance figuring this addback amount, please contact us and we will be happy to help.
- Any bonuses paid to employees, including any amounts earmarked for the holidays. Any bonuses paid to employees must be included in gross wages and be subject to all employment taxes.
- Other taxable fringe benefits to be included on your employees’ W-2 (for example, term life insurance not qualifying for exclusion or premiums for coverage exceeding $50,000).
While the above list is not inclusive of all possible year-end wage adjustments, these are the most common items encountered by businesses. If you have any questions, please reach out to your tax advisor.
Overtime and Tip Reporting Obligations for 2025:
Overtime:
The One Big Beautiful Bill Act (OBBA) contains a provision providing a tax deduction for employees’ overtime in 2025 through 2028, which requests employers to report additional information to employees.
Originally, the data regarding overtime income was to be reported on W-2 form. However, the IRS could not get the changes made to the 2025 W2 forms to be issued in January 2026, so they have provided some relief for employer reporting. Empoyers now may, but not required, to include the qualifying overtime in the employee’s W-2 form. If an employer chooses not to include the deductible overtime on the W-2 form, the employer still has obligations and must provide the employee with detail on any overtime that is potentially deductible in some form. This detail can be in a memo to the employee explaining what overtime the employee earned that is eligible for the deduction. Starting in 2026, employers will have to report overtime on a W-2 form, as the IRS has drafted the new 2026 W-2. The only overtime that is eligible for a deduction is overtime that is required under Fair Labor Standards Act. No overtime that earned by an employer under state law (that would not be required under federal law) is not eligible for the deduction and should not be reported as qualifying overtime either on the W-2 or in the 2025 report to an employee about such overtime.
As employers you will need to establish a means to easily track what overtime is eligible for the deduction to ensure that the information is readily available. And remember all overtime compensation remains subject to Social Security and Medicare taxes.
Tips:
Additionally, the OBBA provides for a deduction for a qualified tips. Qualified tips received by an individual in an occupation that regularly received tips on or before December 31, 2024. Like overtime, employers do not need to report tips separately on a W-2 or Form 1099 for 2025. Employers are to rely on pay stubs, tip logs, and form 4137 (unreported tips). The IRS has indicated that it will accept reasonable methods for calculating qualified tips for 2025. As with overtime, the tips are subject to Social Security and Medicare taxes.
Since there are limits to what amounts are deductible for employees regarding both overtime and tips, we are recommending that you add a statement simply informing the employee that the amounts may be deductible, to avoid inadvertently providing the employee with tax advice.
1099 Reporting
Obtain completed W-9 for all Vendors. Review information annually to make sure no changes are necessary.
- This form lets you know if you need to issue a 1099 for a vendor receiving payments of $600 or more.
- Obtain completed form before the vendor receives their first payment. This eliminates the need to request missing W-9 forms later and increases efficiency.
If foreign contractor is a non-U.S. person and performs all work outside the U.S., then form 1099 may not be required by the business. But they should file a Form W-8BEN to certify that they’re not a U/S. taxpayer.
Payments to 1099 vendors made via credit card, debit card, or third-party system, such as PayPal and Venmo are excluded from 1099-MISC and 1099-NEC calculations. This is because the financial institution reports these payments, so you don’t have to.
- Payments made with Zelle are not classified as a third-party settlement; therefore, these payments need to be included in your 1099 reporting.
- Payments with Paypal/Venmo
- When you pay a personal account, you decide whether to tag the payment for “goods and services,” if not done you are required to issue 1099 for total payments of $600.
- When you pay a business account, payment tagging is not necessary as Paypal/Venmo will issue 1099.
1099-NECs are due to recipients and the IRS by January 31, 2026.
1099-MISCs are due to recipients by January 31, 2026 and it the IRS by February 28, 2026, if you file on paper or March 31, 2026, if you file electronically.
Remember the IRS lowered the threshold in 2025 to 10 or more information returns requiring electronic filing of 1099s.
There are penalties for not filing 1099s ($60 up to $330 per information return, with maximums depending when filed). If any failure to file a correct information return is due to intentional disregard, the penalty is at least $660 per information return with no maximum penalty.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.