Small business tax compliance checklist for year-end

Year-end tax compliance runs from November through January. Not December 31st. Not a frantic all-nighter. Three full months.

Most professional service firms wait until the last week. A healthcare practice discovers mid-January that locum tenens providers never submitted W-9 forms. Backup withholding calculations begin at 11 PM. A creative agency opens QuickBooks on January 28th and finds payroll totals off by $47,000. A law firm learns during audit that partner distributions were recorded as employee wages for two years.

The cost goes beyond late fees. Missed deadlines trigger IRS matching programs. Classification errors invite employment tax audits. Incomplete documentation turns financing applications into interrogations and due diligence into deal-killers.

Professional service firms need a systematic approach across six compliance categories: payroll tax, income tax, sales and use tax, contractor and vendor management, entity and licensing requirements, and financial documentation. Execute these methodically from November through January.

Payroll tax compliance: Close the year without surprises

Payroll errors cascade. A December mistake shows up as an April W-2 mismatch, triggers an August IRS notice, and costs three days and $5,000 to unwind.

Final payroll run verification

Before you process your last 2025 payroll, verify three things.

First: Your payroll system year-to-date totals must match your general ledger. Discrepancies mean you missed a payroll run, recorded a bonus incorrectly, or forgot to post tax deposits.

Second: Every employee needs a Social Security Number matching their card exactly. The SSA rejects 8 percent of W-2s annually because names do not match. Katie Morrison files taxes as Katherine A. Morrison. Rejection. Fix these now, not in February when employees call angry.

Third: State withholding must reflect reality. Your employee moved from New York to Florida. Your system still withholds New York tax. Fix it. Most states require withholding based on where work is performed, not where the company is based.

Industry complications multiply. Law firms must separate partner draws from employee compensation. Healthcare practices juggle salary, productivity bonuses, and distributions across multiple provider types. Creative agencies track volatile commission-based pay. Nonprofits split hours between staff and volunteer work.

Form 941 and year-end adjustments

Form 941 reconciles wages, taxes withheld, and deposits each quarter. Q4 2025 covers October through December. Deadline: January 31, 2026.

Run your 941 reconciliation mid-December. Compare draft 941 wages against general ledger. Check that all Q4 payroll tax deposits appear correctly. Common problems: manual adjustments missing from 941 calculations, bonuses processed outside normal cycles, reimbursements treated as taxable wages.

December brings unusual events. Year-end bonuses. Final PTO payouts. Last reimbursements. Decide whether to pay bonuses in December 2025 or January 2026. Bonuses require 22 percent federal withholding (37 percent if year-to-date supplemental wages exceed $1 million). PTO payouts count as wages subject to all employment taxes.

Income tax compliance: Position your firm for clean filing

Estimated payments and business expenses

Most professional service firms make quarterly estimated tax payments. Final 2025 payment: due January 15, 2026.

Calculate expected 2025 tax liability using actual income through November. Compare this to estimated payments already made. Safe harbor protects you if you paid at least 100 percent of 2024 tax liability (110 percent if 2024 AGI exceeded $150,000).

December reveals forgotten expenses. Run a detailed expense report for 2025. Compare credit card statements against recorded expenses. Review bank statements for uncategorized payments.

Law firms: Verify CLE courses, bar dues, professional liability insurance, legal research subscriptions. Healthcare practices: Confirm CME courses, license renewals, DEA renewals, malpractice insurance. Creative agencies: Check software subscriptions (Adobe, Figma), stock photography, hosting. IT firms: Document certifications (AWS, Azure), cloud infrastructure, development tools. Nonprofits: Track program supplies, donor management software.

Review meals separately. Business meals with clear purpose are 50 percent deductible. Entertainment lost its deduction after the Tax Cuts and Jobs Act.

Retirement contributions and entity structure

Employer retirement contributions reduce taxable income for the year attributed to, even if paid after December 31st. SEP IRA contributions are due by tax return deadline with extensions (mid-September 2026 if you extend). Solo 401(k) employer contributions follow the same deadline, but employee deferrals must be deposited by December 31, 2025.

For 2025: Solo 401(k) allows $23,000 employee deferral plus up to 25 percent of compensation as employer contribution (total limit $69,000). SEP IRA allows up to 25 percent with the same limit.

Review whether your entity structure makes sense. A sole proprietor clearing $200,000 annually might save $15,000 in self-employment taxes with S-corporation election. To elect S-corp status for 2026, file Form 2553 by March 15, 2026.

Sales and use tax compliance: The forgotten tax category

Sales and use tax hits professional service firms harder than most owners expect. Multi-state clients and remote employees create compliance traps.

Multi-state sales tax and use tax

The 2018 Wayfair decision changed everything. Economic nexus (typically $100,000 in annual sales or 200 transactions in a state) triggers filing obligations in customer states.

Which services face sales tax? It varies wildly. Many states tax graphic design, web design, and photography. Software development faces taxation in several jurisdictions. Healthcare services are generally exempt, except cosmetic procedures. Legal services escape taxation in most states. Management consulting varies by state.

Sell digital products? Ebooks, courses, software? Sales tax likely applies in most states. Track customer locations. Register where you exceed nexus thresholds.

Use tax is sales tax's twin. When you buy goods or services from out-of-state vendors who do not collect sales tax, you owe use tax to your home state. Common situations: software subscriptions from out-of-state providers, office equipment from online retailers, professional services from consultants in other states.

Review 2025 purchases. Flag purchases where no sales tax was collected. Calculate use tax owed. Remit it with your year-end filing.

Nexus evaluation

Professional service firms serve clients nationwide now. Video calls replace travel. Remote work eliminates office visits.

Nexus-creating activities: employees working remotely from another state, regular business travel to a state, owning or leasing property in another state, storing equipment in another state.

Evaluate where you might have nexus. Determine whether you need to register for sales tax, set up income tax withholding for remote employees, or file state income tax returns for your entity.

Contractor and vendor compliance: Avoid 1099 filing disasters

The IRS matching program compares what you report on 1099s against what contractors report. Mismatches trigger automated notices. Multiple mismatches trigger audits.

Contractor classification and missing W-9 recovery

Apply the three-factor IRS test to any contractor relationship exceeding $50,000 annually or lasting longer than one year.

Red flags: contractors working more than 30 hours weekly for you, contractors working continuously over two years, contractors with no other significant clients, contractors working from your office using your equipment, contractors receiving employee-style benefits.

Questionable classification? Consult an employment attorney or CPA before issuing 1099s. Converting a contractor to employee now costs payroll taxes and paperwork. IRS reclassification later costs back payroll taxes, penalties, interest, and possibly unemployment insurance for years past.

You cannot file 1099s without valid Taxpayer Identification Numbers. List all vendors paid $600 or more in 2025 missing W-9s. Send email requests now (early December) with December 15th deadline. Follow up by phone for non-responders.

Backup withholding is the penalty for missing W-9s. Withhold 24 percent of all payments and remit to IRS using Form 945. This creates massive headaches. Collect W-9s before you pay anyone.

Payment reconciliation

Common 1099 preparation mistakes: prepaid expenses hiding contractor payments, payments made by owners personally missing from systems, contractor payments misclassified as cost of goods sold, entity classification errors resulting in filing 1099s for C Corporations.

Reconcile contractor payments across all systems. Export data from accounting software, payroll systems, credit card processors. Cross-reference against W-9s on file.

Industry patterns: Law firms pay contract attorneys, expert witnesses, court reporters, process servers. Healthcare practices pay locum tenens physicians, medical billing services, transcription vendors. Creative agencies pay freelance designers, photographers, copywriters, videographers. IT firms pay subcontractors, specialized developers, security consultants. Nonprofits pay grant writers, fundraising consultants, program facilitators.

Entity and licensing compliance: Stay in good standing

Entity compliance protects limited liability and keeps you legally operational. State franchise taxes and property taxes create a six-month gauntlet from January through June.

Annual reports and state franchise taxes

Most states require annual or biennial reports for LLCs and corporations. Due dates vary. Some use formation anniversary. Others use fixed dates. Fees range from $25 to over $800. Late fees often double the charge. Continued non-filing results in administrative dissolution.

Delaware annual franchise tax: Due March 1, 2026. All Delaware entities must file and pay by this deadline. Penalties start at $200 and increase monthly. Delaware will dissolve your entity for non-payment, destroying limited liability protection.

California franchise tax: Due April 15, 2026 for calendar-year entities. California imposes minimum $800 annual franchise tax on most entities, regardless of income or activity. Zero California income? Still owe $800. California suspends entity privileges for non-payment, preventing you from defending lawsuits or enforcing contracts.

Both states enforce aggressively. Plan for these deadlines now.

Property tax filings

Business personal property taxes apply to furniture, fixtures, equipment, computers, and machinery. Even if you lease your office.

Filing deadlines concentrate January through June. California: January 1-April 1. Texas: January 1-April 15. Florida: April 1. New York: Varies by county.

Failure to file triggers 10 to 25 percent penalties plus interest. Some jurisdictions estimate what you own and bill generously.

Professional licenses and corporate minutes

Law firms need annual bar licenses, trust account certifications, firm registrations. Healthcare practices need biennial medical licenses, three-year DEA registrations, board certifications. Accounting firms need CPA licenses and peer review compliance. IT professionals need security and vendor certifications.

Create a 2026 master calendar now. Many licenses require continuing education before renewal.

Corporations and multi-member LLCs should document formal decisions. Annual meetings or written consents prove you maintain corporate formality. Common resolutions: salary determinations, dividend approvals, major contracts, bank authorizations.

Law firms must reconcile IOLTA accounts with client subsidiary ledgers. Some states require third-party trust account audits. Healthcare practices need provider credentialing renewals, biennial CLIA certifications, annual facility licenses. Nonprofits file Form 990 (due 5th month after fiscal year-end), maintain state charitable registration renewals, provide donor acknowledgment letters for contributions over $250.

Financial documentation compliance: Audit-proof your records

Clean financial records support tax filings, survive audits, secure financing, and facilitate due diligence.

Bank reconciliation and receipt organization

Reconcile all bank and credit card accounts through November 30th before December 15th. The two-week buffer gives you time to investigate discrepancies.

Common problems: deposits in transit that never cleared, outstanding checks over 90 days old, bank fees not recorded, credit card payments posted to wrong accounts, duplicate entries.

Resolve every discrepancy. Never force balance by posting unexplained differences to suspense accounts. This creates audit problems and hides your true cash position.

Digitize paper receipts now. Most thermal inks fade within three to five years. The IRS can audit three years after filing (six for substantial underreporting). Scan or photograph receipts. Organize by category and month.

Expense categorization

Review expense categories. Common mistakes: equipment purchases recorded as supplies (should be depreciated if over $2,500), client meals recorded as entertainment (meals are 50 percent deductible, entertainment is not), personal expenses mixed with business, loan principal recorded as interest, owner draws recorded as expenses.

Run a detailed expense report by category. Investigate unusual patterns. A graphic design firm showing $50,000 in office supplies probably has equipment hiding in the wrong category.

Law firms: Reconcile IOLTA ledgers to client subsidiary ledgers. Maintain engagement letters. Healthcare practices: Organize patient billing records, insurance claim documentation. Maintain pharmaceutical disposal documentation for DEA. Nonprofits: Separate restricted from unrestricted funds. Track grants with project-level reporting. Keep donor acknowledgment letters for contributions over $250.

Tax extension filing strategy: When extensions make sense

Extensions buy time to file complete returns. They do not extend payment deadlines.

File extensions when year-end books are not reconciled by mid-February, when complex transactions need documentation time, when waiting on K-1s from partnerships or S-corporations, or when entity structure changed mid-year.

Estimate tax liability. Pay by original deadline. Extension forms only provide time to file paperwork, not time to pay.

Form 7004: Automatic six-month extensions for Form 1065 (partnerships) and Form 1120-S (S-corps). Original: March 17, 2026. Extended: September 15, 2026.

Form 4868: Automatic six-month extension for Form 1040 (individual). Original: April 15, 2026. Extended: October 15, 2026.

Most states match federal extension periods. California requires form FTB 3539. Research your state requirements.

Year-end compliance calendar

Distribute work across ten weeks. Avoid December panic.

1. November (Weeks 1-4): Run preliminary payroll reports. Export vendor payments. Flag missing W-9s. Review 2026 filing requirements. Request W-9s (deadline December 15). Verify employee SSNs. Calculate Q4 estimated tax. Complete November reconciliations. Code all expenses through November. Follow up on missing W-9s. Review sales tax nexus. Assess use tax obligations.

2. December (Weeks 5-8): Process year-end payroll adjustments: bonuses, PTO. Review contractor classification. Process final 2025 payroll. Generate draft W-2s and 1099-NECs. Prepare Q4 Form 941. Complete December reconciliations by December 7th. Decide on estimated tax payment. Record remaining 2025 expenses. Document corporate minutes. Final W-9 follow-up. Review entity structure. Maximize retirement contributions before December 31. Calendar March 1 Delaware and April 15 California franchise taxes. Year-end close procedures.

3. January (Weeks 9-10): Finalize W-2s and 1099-NECs. File Q4 estimated tax by January 15. Distribute forms by January 31. File with SSA and IRS by February 2-3. File Q4 Form 941 by January 31. File Form 940 if liability exceeds $500.

Conclusion: Compliance as competitive advantage

Clean compliance unlocks opportunities. Lenders review returns before approving credit. Investors conduct due diligence before committing capital. Buyers discount purchase prices for compliance issues.

Professional service firms that excel start early (November, not December), work systematically (weekly blocks, not all-nighters), maintain clean records year-round (monthly reconciliation), and delegate appropriately.

The six compliance categories function as a system. Weakness in any area creates risk. Strength across all six creates confidence.

Outsource when you spend more than 15 hours monthly on compliance, manage more than 20 employees across multiple states, issue more than 30 contractor 1099s, operate in five or more states, or face complex entity structures.

Full-service compliance support typically runs $1,500 to $5,000 monthly depending on size and complexity. Compare this to hiring internal staff at $50,000 to $70,000 annually plus accountant fees, and more importantly, to penalties and lost opportunities from compliance failures.