1. Reconcile All Bank and Credit Card Accounts

Why Reconciliation Matters

Reconciling your bank and credit card accounts is the first step in confirming that all transactions recorded in your books match your financial statements. Discrepancies may arise from bank fees, unrecorded expenses, or timing issues with deposits. Regular reconciliation helps you identify errors early, reducing the chances of costly surprises during tax season.

How to Reconcile

1. Gather Statements: Collect all bank statements and credit card statements for the year.
2. Match Transactions: Compare each transaction in your accounting software to the statements. Make sure deposits, withdrawals, and fees match exactly.
3. Investigate Discrepancies: Look for missing or duplicated entries. Pay special attention to transactions that appear in your bank statement but are not in your accounting software (or vice versa).
4. Adjust Balances: If discrepancies are found, correct them so the balance in your books matches the statement.

2025 Considerations

With the continued rise of digital banking, many small businesses use third-party payment platforms. Make sure you reconcile those platforms as well. Up-to-date reconciliations will save time and reduce errors when it’s time to file taxes.

2. Finalize Payroll and Employee Benefits

Ensuring Accuracy

Payroll is one of the most scrutinized areas for small businesses. Errors in payroll withholding, wage reporting, or benefits calculations can lead to penalties and frustrated employees. Before the end of the year, review your payroll records thoroughly.

Key Steps

1. Verify Employee Information: Confirm names, addresses, and Social Security numbers are correct.
2. Review Wage Details: Check for any salary adjustments, bonuses, or commissions that need to be recorded before December 31.
3. Confirm Tax Withholdings: Ensure federal, state, and local taxes have been withheld accurately throughout the year.
4. Review Benefits Deductions: Look at health insurance premiums, retirement contributions, and any flexible spending account (FSA) deductions. Confirm that the total deductions match what’s recorded in both your payroll system and your general ledger.

Year-End Adjustments

In 2025, small business owners should stay alert to any changes in wage thresholds or new local regulations. Also, if you offered new benefits such as wellness stipends or remote-work allowances, incorporate these into your final payroll totals to avoid tax-related issues.

3. Prepare and Distribute 1099s

Who Needs a 1099?

If you’ve paid a contractor or freelance professional more than $600 during the year, you generally need to send them a Form 1099-NEC (previously 1099-MISC in certain contexts). The 1099-NEC is used for non-employee compensation, ensuring that the IRS is aware of payments made for services outside traditional employment.

Checklist for 1099 Preparation

1. Gather W-9 Forms: Ensure you have an updated Form W-9 for every contractor you’ve paid. This document provides their Tax Identification Number (TIN) or Social Security number, along with other essential details.
2. Review Payment Records: Cross-check payment logs with your accounts payable records to confirm the total amount paid to each contractor.
3. File on Time: The IRS deadlines for 1099 forms typically fall toward the end of January. Mark your calendar to avoid late-filing penalties.
4. Distribute Copies: Send out the correct copy of the 1099 form to each contractor and file the appropriate copy with the IRS.

Latest Regulations

For 2025, be mindful of any new digital filing requirements or threshold adjustments. Certain states also require direct 1099 reporting, so double-check if your state has additional obligations.

4. Conduct Inventory Counts (If Applicable)

Why Physical Counts Are Critical

If your business sells products, a year-end physical inventory count is crucial for accurate cost of goods sold (COGS) reporting. Miscounting inventory can lead to incorrect financial statements, which can ripple into misguided budgeting and potential tax complications.

Inventory Count Best Practices

1. Plan Ahead: Schedule a day (or days) when you can halt or reduce sales operations to minimize discrepancies.
2. Organize Your Space: Before counting, make sure shelves and bins are well-labeled. Remove obsolete or damaged items from inventory or note them separately for write-offs.
3. Use a Team and Double-Check: Have at least two people count each section of inventory. Cross-verify counts to ensure accuracy.
4. Update the System: Once counts are finalized, update your accounting software. Adjust if there are discrepancies between the physical count and digital records.

Technology in 2025

Cloud-based inventory management solutions are increasingly popular. In 2025, more businesses are integrating real-time tracking with their point-of-sale (POS) systems. If you haven’t yet embraced these technologies, year-end is an excellent time to consider an upgrade that simplifies future counts.

5. Review Financial Statements

The Big Picture

Once you’ve reconciled accounts, finalized payroll, handled 1099s, and updated inventory records, it’s time to review your financial statements. This includes your balance sheet, income statement, and cash flow statement. Together, these reports offer a comprehensive snapshot of your business performance for the year.

Analyzing Statements

1. Balance Sheet: Confirm that assets and liabilities are recorded correctly. Look for large fluctuations compared to the previous year and investigate the causes.
2. Income Statement: Examine your revenue streams and expense categories. Identify any outliers or dramatic year-over-year changes. This data can guide your budget and forecasting for the new year.
3. Cash Flow Statement: Compare operating, investing, and financing cash flows. Consistent negative cash flow could signal the need for strategic financing or cost-cutting measures.

Setting Goals for 2026

A thorough review of 2025 financials can inform your plans for the coming year. Are you meeting profit margin targets? Is there an opportunity to expand into new markets or product lines? Use these insights to craft strategic goals and refine your operating budget.

6. Prepare for Tax Season

Why Early Preparation Helps

Completing the year-end tasks as soon as possible sets you up for stress-free tax filing. Not only will you avoid the last-minute scramble, but you’ll also have enough time to leverage any potential deductions or credits you might otherwise miss.

Gather Tax Documents

• Previous Tax Returns: Review last year’s return to identify items or credits that may apply again.
• Receipts and Documentation: Ensure all relevant expenses are documented, from office supplies to software subscriptions.
• Mileage Records: If you use your personal vehicle for business purposes, have detailed mileage logs ready.

Consult with a Professional

Tax regulations evolve every year, and 2025 is no different. Legislative changes can affect deductions, credits, and deadlines. Engaging a qualified CPA or tax professional—like those at Frontrunner Financial—can ensure you comply with current rules and uncover new savings opportunities.

7. Organize and Store Records Securely

Digital vs. Physical Storage

Whether you keep digital records, physical files, or a combination of both, ensure everything is in order. For digital files, maintain a clear folder structure, and for physical documents, store them in labeled binders or filing cabinets.

Retention Requirements

The IRS recommends keeping tax returns and supporting documents for at least three years. Certain records—like asset purchase invoices—may need to be kept longer if they’ll affect future tax returns (e.g., depreciation schedules).

Data Security

In 2025, cybersecurity remains a top concern for small businesses. Invest in encryption and secure backup solutions to protect sensitive financial data. Breaches or data loss can lead to compliance issues and erode customer trust.

8. Plan Ahead for the New Year

Budget and Forecast

Now that you have a clear picture of your financial performance, start budgeting for 2026. Break down expenses by category and set realistic revenue goals. Consider seasonal fluctuations, market trends, and any expansions you’re planning.

Review Vendor Relationships

Year-end is a great time to evaluate the contractors, suppliers, and service providers you worked with throughout 2025. Are you satisfied with their performance and pricing?

Renegotiating terms or seeking new partnerships can potentially save you money in the new year.

Employee Performance Reviews

If you have staff, year-end is an ideal time to conduct performance evaluations. Align employee goals with the company’s financial objectives to ensure everyone is working toward the same targets in 2026.