Is your salary ready for the end of year?
As an employer, you are responsible for ensuring that bookkeeping and accounting obligations are met when submitting the annual financial statements. This is true even if payroll processing, payments, and deductions are managed by a payroll bureau.
What is a year-end closing?
Any employer who has made salary payments during a calendar month is required to report these to the tax authorities (SKAT). As an employer, you must also ensure that basic records, audit trails, and transaction logs are maintained in accordance with the Bookkeeping Act.
At Azets, we assist many companies with both payroll and accounting, and I often come across clients who are uncertain about what payroll-related tasks they need to address before a year-end closing. This blog post aims to provide an overview and a practical guide for managing the year-end closing process.
Update on the 2025 year-end closing
Over the last year we’ve seen the Holiday Pay Fund (Lønmodtagernes Feriemidler, LFM) request more documentation for company submissions. We’ve also observed increased scrutiny from the Tax Authority regarding staff expense advances and VAT deductions. Likewise, auditors are paying greater attention to holiday‑pay provisions than before. As such, these are key areas to focus on for this year’s close.
Cap on deductions for elevated salaries
From 1 January 2023 a change came into force limiting a company’s ability to claim tax deductions for salary costs. The rule restricts deduction of salary expenses for persons with annual pay exceeding DKK 8,305,200 (2025 level). Salary costs include ordinary taxable salary (subject to AM‑contribution), certain share schemes, employee benefits, bonuses, tax‑free travel allowances and so forth.
You must pay particular attention to cases where the individual has multiple employment contracts within the same group – the cap follows the person. The rule also applies to employees not resident or taxable in Denmark.
Reconciliation of salaries
The Danish Executive Order on Minimum Accounting Requirements requires your company to present a reconciliation of the salaries, fees, etc. which have been reported to the Danish Customs and Tax Administration.
A payroll reconciliation consists of two parts:
- Reconciliation between payroll system and the Danish Customs and Tax Administration
- Reconciliation between payroll system and accounting system.
I would recommend that you create salary types in your payroll system so that individual payroll items are handled separately. In the same vein, it’s a good idea to create a number of separate accounts in your accounting system for posting these payroll types. This gives you a better overview of the individual salary components and facilitates reconciliation work.
We also recommend always conducting a separate reconciliation of AM‑contributions.
Provision of holiday pay and bonus, etc.
In order for your annual accounts to accurately show a period's salary costs, it is important that as an employer, you calculate holiday pay, holiday supplements, bonuses, etc., so as to create a fair basis for making provisions for this in the annual accounts.
As an employer, you should pay particular attention to the method to be used for calculating holiday pay accruals. For recognition in the annual accounts, the specific (accounting) method must be used. If as an employer you have chosen to keep the frozen holiday pay obligation, this must appear as a long-term liability, and it must be indexed annually at the rate provided by the Employees’ Fund for Residual Holiday Funds (Lønmodtagernes Feriemidler).
My recommendation is that you produce a monthly statement of your company’s holiday‑pay liability (including holiday allowances). This will simplify your holiday‑pay reconciliation and settlement work (for example when employees leave).
What is the auditor looking for?
If your payroll process is manual, errors will occur more often than if the payroll process is automated. A manual payroll process therefore increases auditors' interest in control.
Your auditor should, as a minimum, check that you have conducted payroll reconciliation and that there are legitimate explanations for any differences. The auditors don’t only check that the income subject to social security contributions has been reconciled, but also that pensions, tax-free transport, canteen VAT, etc. has been reconciled. At the very least, the auditors should also check that all the provisions have been calculated and booked correctly.
After the amendment to the Holiday Act, both provision and reconciliation of holiday pay have become a focal point for the auditors. This applies not least to the correct handling of the indexation of holiday pay for those companies that have chosen to administer the frozen holiday pay themselves.
In my experience, auditors also request documentation that A tax, social security contributions, ATP, etc. has been paid in, so that no debt is owed for this. For this reason, I would recommend that you reconcile your tax account.
In need of assistance
As Denmark's largest payroll bureau, Azets can help you optimize your entire payroll process and automate the manual tasks involved. By streamlining your payroll process, you’ll free up resources to focus on your core business.
If your company isn’t ready for full outsourcing, we can also provide support for a limited time.
We can assist with the following areas:
- Payroll reconciliation (A-income reconciliation, bookkeeping/E-income, and payroll systems)
- Balance reconciliation of outstanding payroll items
- Reconciliation of vacation pay liabilities/provisions
- Reconciliation of vacation pay liabilities with FeriepengeInfo
- Assistance with audit documentation and participation in meetings with auditors regarding payroll costs.
Contact Azets at 70 232 232, and let’s have a no-obligation chat about your needs.
