Year-end (YE) is a year-long process that payroll professionals should be working on long before it is actually needed. Effectively using payroll analytics to improve your YE processes is among the best practices that payroll analytics support.

Payroll analytics support all of the YE processes, including the following:

  • Managing the YE project
  • Reconciling and balancing the data from each pay period and totals on annual tax forms
  • Reconciling and balancing the employee and employer tax data from each pay period and tax deposits from each deposit period during the year
  • Identifying variances between the employee’s resident state and the state where income tax withholding occurs and wages are reported for unemployment insurance

Many payroll applications have added analytical processes as features. Payroll professionals should closely examine each system upgrade to understand which new analytical tools are now available. If the system being used does not yet have analytical tools embedded into it, Microsoft’s Excel and Power BI provide many analytical tools that can be used to improve YE processes by adding analytical best practices.

The following are examples of analytical methods that can be used to ensure YE reporting uses practical tools:

 

Exceeding Annual Maximum Pension/Retirement Contribution

In 2025, the following three thresholds will limit contributions to defined contribution plans (401(k), 403(b), and 457(b)):

  1. Under age 50 on December 31, 2025, the maximum contribution is $23,500
  2. Ages 51-59 and over 63 on December 31, 2025, the maximum contribution is $31,000
  3. Ages 60-63 on December 31, 2025, the maximum contribution is $34,750

The Practical Analytics Tool to Use—Excel’s FILTER feature allows using the employee’s age and contributions to the qualified retirement plan to identify employees whose year-to-date contributions exceed the maximum allowed by the IRS based on the employee’s age.

 

Exceeding a Wage Base

Each year, employees’ wages face the following three wage bases:

  1. Social security is $176,100 in 2025
  2. Federal unemployment tax of $7,000 in 2025
  3. State unemployment tax in 2025 ranging from $7,000 to $72,800

In addition, many states have wage bases for paid family and medical leave (PFML) and disability insurance. Local jurisdictions may calculate local income tax on wages once the employee reaches a threshold.

Payroll systems use the wage base thresholds to correctly calculate the employee and employer taxes, stopping or starting the tax calculation when the employees’ wages reach and exceed the wage base. However, if an off-cycle payment is not correctly recorded, the taxes will likely not be calculated and withheld correctly.

The Practical Analytics Tool to Use—To ensure all payments are recorded correctly and tax calculations are stopped when the appropriate wage base is reached, Excel’s IF-OR features can identify employees’ wages and taxes that exceed the wage bases. After the employees with variances have been identified, the employees that must be reviewed can be easily identified using Excel’s Sort feature.

 

Calculating Employee, Employer Taxes

Similar to the validation of wage bases, various employee and employer taxes are calculated using a flat tax rate. However, the flat rate tax calculation may be incorrect because of an off-cycle payment or an adjustment to the payroll data.

The Practical Analytics Tool to Use—Excel’s IF feature provides a tool for calculating tax based on a flat rate and comparing the calculation to the value recorded in the system. The IF feature will identify the employees with variances between the tax recorded in the system and the calculated value. Once the employees with variances have been identified, the employees that must be reviewed can be easily identified using Excel’s Sort feature.

 

Negative Wages or Taxes

Adjustments to employees’ wages and taxes may cause negative wages or taxes for a month, quarter, or year. If negative wages or taxes are reported to a jurisdiction, the jurisdiction is likely to either drop the record with the negative amount or convert the negative amount to a positive amount. In either situation, if a jurisdiction drops a record with a negative wage or tax, or changes the negative amount to a positive amount, the wages and taxes reported will be out of balance.

Before a quarter or annual wage and tax report is submitted to a jurisdiction, analytics can identify employees with either negative wages or taxes allowing corrections to be made.

The Practical Analytics Tool to Use—Using Excel’s FILTER formula, all employees with negative wages or taxes can be identified. Then, using the Sort feature, the employees with negative wages or taxes can be brought to the top of the spreadsheet. Using simple controls like these each pay period can make reconciling at quarter or year-end much simpler.

 

Differences in State Income Tax, Unemployment Insurance, Residence State

With employees able to change their addresses using employee self-service (ESS), it is not unusual for employees who have relocated to fail to update their state for state income and unemployment taxes. When this happens, the employee who has failed to make the change will bring it to the payroll department’s attention after receiving their Form W-2, Wage and Tax Statement. The employee may ask to have a new Form W-2 or corrected Form W-2c prepared with wage and tax information based on their current resident state. This request may require the payroll department to file amended state income tax wages and withholding returns for the employee’s prior and current state of residence. Along with the amended return, a request for a refund from the prior state and payment of taxes to the current state are also required.

In addition, similar steps will need to be taken to correct the unemployment wages reported and taxes paid to the prior and current states.

The Practical Analytics Tool to Use—To avoid these complications, analytics can identify employees with differences between their residence state (in their address) and the states in their income and unemployment tax setups. Excel’s IF formula allows the ability to compare two cells in a spreadsheet downloaded from the payroll application. The IF formula will identify employees with differences between their resident state and the states in their income and unemployment tax setups. After applying the IF formula using Excel’s Sort feature, the column that identified differences will place all the employees who must be reviewed at the top of the spreadsheet.

 

Differences in State Income Taxable Wages, Federal Income Taxable Wages

Many states use the same definition of taxable wages that the federal government uses for income tax purposes. Other states, such as the following, have variances between the state and federal definitions of taxable wages:

  • Alabama exempts overtime premium wages made from income tax and withholding from January 1, 2024, through June 30, 2025
  • Pennsylvania requires federal pretax contributions to qualified retirement plans to be included in Pennsylvania taxable wages

Employees with differences between their federal and state taxable wages should be reviewed regularly to ensure correct withholding has occurred.

The Practical Analytics Tool to Use—After downloading the employees’ federal and state wages and the state where wages will be reported, Excel’s FILTER formula can produce a table with employees whose federal and state wages vary. By sorting the table by state, the employees with variances that must be reviewed can be identified.

 

In summary, effectively using payroll analytics to improve your YE processes is among some of the best practices you can do (see also “A Step-by-Step Approach to Payroll YE” and Payroll 101 in the May issue of PAYTECH). The only limitation on how payroll analytics can be used is up to each payroll professional’s imagination.

Attend PayrollOrg’s Foundations of Payroll Analytics and Intermediate Payroll Analytics courses for more information on payroll analytics best practices.

This article originally appeared in the May 2025 issue of PAYTECH.

Jim Medlock, CPP, is a Payroll Compliance Educator at Medlock & Associates and was the former Education Advisor for PayrollOrg. He is a PayrollOrg Ambassador and a volunteer on PayrollOrg’s National Speakers Bureau, Ask an Expert Committee, Certification Item Development Task Force, Best Practices Subcommittee of the Strategic Payroll Leadership Task Force (SPLTF), and the Federal Issues and State and Local Topics Subcommittees of the Government Relations Task Force (GRTF). He was also a guest on PayrollOrg’s “PayTalk” Podcast®. He received PayrollOrg’s Team Member Legend award in 2018 and was named Payroll Man of the Year in 1991.

Mark Thornton, CPA, CPP, is the Payroll Tax Supervisor at Southern Company and also a Vice President on PayrollOrg’s Board of Directors. He volunteers on PayrollOrg’s Finance and Audit Committee and National Speakers Bureau, was a guest on PayrollOrg’s “PayTalk” Podcast®, and received PayrollOrg’s Meritorious Service Award in 2022.