It’s Time for Your Year-End Audit: 7 Mistakes to Avoid 

Closing out the year in HR and payroll can feel like a hold-your-breath, balancing act. Between compliance deadlines, employee updates, and financial reconciliations, you know that even small oversights can snowball into penalties or frustrated staff. And the truth is, most year-end stress doesn’t actually come from the tasks themselves. It comes from preventable mistakes that end up derailing all your efforts to be prepared.  

Our teams have helped countless businesses navigate the year-end audit process. Over the years, we’ve also spotted a few common missteps. Grab your coffee, settle in, and keep reading. We’ll share seven of the most common pitfalls businesses hit, why they matter in 2025, and what you can do differently this time around. 

1. Overlooking Employee Demographic Data 

Names, addresses, and Social Security numbers might seem like “set it and forget it” details. However, they’re the backbone of year-end reporting. And when employee demographic data is wrong, everything downstream is impacted. Incorrect addresses lead to undeliverable W-2s. Typos in Social Security numbers result in rejected filings. Even a missing middle initial can create confusion with government systems. 

In SHRM’s 2025 workplace trends, HR leaders pointed to workload and data accuracy as two of their biggest challenges during peak compliance seasons. That makes year-end the perfect time to catch and correct errors before they trigger bigger issues. 

How to stay ahead: 

• Run a demographic audit in early November. 

• Ask employees to log in and confirm their personal details. 

• Lock edits by mid-December to avoid last-minute changes. 

2. Incorrect State Tax Withholding 

Employees move often and can work from anywhere, whether relocating for work or working remotely across state lines. But when their “lived-in” and “worked-in” states aren’t updated quickly, payroll withholding gets messy. An incorrect setup can trigger under-withholding, amended filings, and a backlog of corrections. 

State agencies are paying closer attention, too. In 2025, multiple states increased enforcement around wage and withholding compliance, particularly for remote workers. That means errors are both inconvenient and costly. 

How to stay ahead: 

• Review employee state records as soon as a move is reported. 

• Confirm both residence and work locations are coded properly. 

• Train managers to flag relocations quickly, so payroll updates aren’t delayed. 

3. Misapplied Local Taxes

Local taxes are one of the trickiest parts of payroll. Cities, counties, and even school districts can impose their own requirements, and the rules change often. Misapplying local taxes might seem minor. But it can lead to notices, adjustments, and employee complaints once discrepancies are spotted. Getting this wrong can create messy reconciliations in January. 

How to stay ahead: 

• Confirm that the correct local jurisdictions are applied to every employee. 

• Stay current on changes in local tax codes for the areas where your employees live and work. 

• Run reports to spot any employees missing a local assignment. 

4. Misclassifying Contractors 

The fine line between an employee and independent contractor has grown blurrier with the rise of gig work and flexible staffing models. But misclassifying workers is one of the most common (and costly) mistakes employers make. If a contractor should be an employee, or vice versa, compliance penalties can add up quickly. 

Year-end is also when 1099-NEC forms come due. If contractors aren’t coded correctly, their payments may not be tracked, leading to missed or late filings. 

How to stay ahead: 

• Review contractor classifications against IRS guidelines. 

• Confirm whether Netchex should generate and file 1099-NEC forms on your behalf. 

• Make sure contractor payments issued outside the system are included in year-end totals. 

5. Missing Additional Payroll Entries 

Not all payroll activity happens through the system in real time. Manual checks, spot bonuses, or expense reimbursements often get issued outside the regular cycle. But if they aren’t recorded properly, year-end totals will be off. 

Incomplete totals affect employees, too. If a bonus or reimbursement isn’t reflected in their W-2, it creates confusion, questions, and possible amendments. 

How to stay ahead: 

• Audit for any manual checks or off-cycle payments. 

• Record these items in an on-demand payroll so they’re included in year-end reports. 

• Cross-check totals against accounting to ensure alignment. 

6. Overlooking Benefits Contributions 

Retirement plans, HSAs, FSAs, and other benefits carry specific contribution limits and reporting requirements. Missing or inaccurate entries create mismatches between what your employees expect and what your year-end reports show. 

For employees, benefits contributions are personal. If retirement or health savings data is missing, it can damage trust and cause frustration during tax season. For businesses, incorrect reporting creates reconciliation headaches and possible compliance concerns, too. 

How to stay ahead: 

• Reconcile benefit contributions before the end of the year. 

• Confirm that additional or one-off contributions are loaded into the system. 

• Communicate with employees about contribution limits and deadlines. 

7. Waiting Until the Last Minute 

Of all the year-end mistakes, procrastination is the one that magnifies everything else. Waiting until December to review your data leaves no margin for error. When mistakes are found late, there’s often no time to fix them before deadlines. 

The IRS and state agencies don’t budge on filing dates either. Penalties and interest pile up quickly for late filings or missed deposits. And employees don’t want to wait for corrected W-2s to file their taxes. 

How to stay ahead: 

• Start audits in October or November to build in correction time. 

• Calendar every due date with reminders set weeks in advance. Sign-up for Netchex reminder emails to ensure the deadlines don’t drop off your radar. 

• Use checklists to stay aligned with key milestones. 

How Netchex Helps You Avoid the Pitfalls 

Year-end will always be a busy season for your business. The difference is whether you approach it with structure, tools, and support or scramble through with crossed fingers. 

Netchex is built to make this season easier: 

• Checklists and deadlines built into the platform keep you on track. 

• Employee data validation helps prevent costly errors before filings. 

• Audit-ready records eliminate the paper chase. 

• U.S.-based support means you always have a team that shows up when you call. 

Whether this is your first year-end or your twentieth, you don’t have to do it alone. With Netchex, you can finish strong and step into the new year with confidence. 

Next Step: [Sign up for Netchex Year-End Reminders] and make sure no deadline slips past you. And if your current provider isn’t helping you every step of the way through this year-end, it might be time to consider a better HR and payroll partner. Let’s chat! 

Closing out the year is not something you have to do alone – it’s a partnership. Verifying your data before year-end makes the process smoother, and our team is here to provide the tools and resources you need to feel supported every step of the way.

LaShawn Johnson, Director, Tax Operations