W-2s at year end: the boxes founders get wrong, and how to fix them

01Box 1, box 3 and box 5#

Three boxes report wages, and each one measures a different tax base. Box 1 is wages subject to federal income tax. Box 3 is wages subject to Social Security tax, capped at the year’s wage base, $184,500 for 2026. Box 5 is wages subject to Medicare tax, with no cap. Boxes 2, 4 and 6 are the tax withheld on each.

A worked example. An engineer earns $200,000, defers $20,000 into a traditional 401(k) and pays $3,000 of health premiums pre-tax through a section 125 plan. Box 1 is $177,000: salary less both. Box 3 is $184,500: the 401(k) deferral is subject to Social Security tax, the section 125 premiums aren’t, so $197,000 would be taxable, but Social Security stops at the wage base. Box 5 is $197,000, uncapped. Box 12 shows code D, $20,000. If boxes 1, 3 and 5 on a W-2 are identical for someone with a 401(k), something is wrong.

Roth 401(k) deferrals behave differently: they are in all three boxes and reported in box 12 with code AA. An S-corporation’s more-than-2% shareholder’s health insurance is in box 1 but generally not in boxes 3 and 5, the reverse of what most people expect.

02Box 12 codes that matter to a startup#

Box 12 carries amounts that don’t fit the wage boxes but the IRS wants to see, each tagged with a one- or two-letter code. There are more than thirty; the 2026 General Instructions for Forms W-2 and W-3 list them all. The ones a seed or Series A company actually uses:

The 2026 form also splits box 14 into 14a (other information) and 14b, for the Treasury tipped occupation code.

• D: traditional 401(k) elective deferrals. AA: Roth 401(k) contributions.
• W: employer contributions to a health savings account, including employee contributions made through a cafeteria plan.
• DD: cost of employer-sponsored health coverage, informational only.
• C: taxable cost of group-term life insurance over $50,000, which also has to be added to boxes 1, 3 and 5.
• V: income from exercising nonstatutory stock options, already included in boxes 1, 3 and 5.
• FF: permitted benefits under a qualified small employer HRA (QSEHRA).
• TT and TP: new for 2026, qualified overtime compensation and cash tips reported to the employer, under the One Big Beautiful Bill Act’s deductions. Most salaried startup staff have neither. TA, also new, is employer contributions to a Trump account.

03What usually goes wrong#

Almost every W-2 error begins as something that happened outside payroll:

• Stock option exercises. An employee who exercises nonstatutory options has wage income on the spread; if payroll was never told, it’s missing from boxes 1, 3, 5 and 12 code V, and the withholding was never collected.
• Benefits paid outside payroll: a home-office stipend, a gym reimbursement, a relocation package or a gift card is taxable wages unless a specific exclusion applies.
• Box 13 “Retirement plan” left unchecked for someone who deferred into the 401(k), which affects their IRA deduction.
• The wrong state in boxes 15 to 17 for a remote employee, because the provider still has them at the office address.
• A founder paid through a mix of payroll and owner draws or contractor payments, which no form can make consistent.

04The W-3 and the SSA deadline#

Form W-3 is the transmittal: it totals every W-2 you file and goes to the SSA with Copy A. W-2s and the W-3 are due to the SSA, and W-2s to employees, by January 31; when that falls on a weekend or a federal holiday, the next business day. For 2026 wages that’s February 1, 2027. There is no automatic extension for either. A 30-day extension to file with the SSA can be requested on Form 8809, but it’s granted only in extraordinary circumstances or catastrophe, and an extension to furnish employee copies needs a separate request.

If you file 10 or more information returns in total for the year, counting W-2s and 1099s together, the W-2s must be filed electronically, through the SSA’s Business Services Online or your provider. The W-3 totals should match the four Forms 941 for the year: wages, Social Security and Medicare wages, and federal withholding. A mismatch between the W-3 and the 941s is a common cause of IRS and SSA notices in the following year.

05State copies#

Most states with a personal income tax require their own copy of each W-2 for employees who worked or lived in the state, usually with an annual reconciliation return, and many set the same January 31 deadline. Some cities and counties with local income taxes require one too. A payroll provider files these where it has your state account numbers; a state you never registered in won’t get one, which is how a missed registration surfaces a year late. Boxes 15 to 20 carry the state and local wages and tax, and an employee who moved mid-year can have two states on one W-2.

06Fixing a mistake: the W-2c#

An error on a W-2 already sent is corrected with Form W-2c, filed with the SSA and given to the employee, with Form W-3c as its transmittal. If the original was e-filed, the correction must be e-filed. Correct promptly: information return penalties use the same tiers as 1099s, lowest within 30 days of the deadline, and the amounts apply per form for both the SSA copy and the employee copy. A correction of wages also usually means a corrected 941 (Form 941-X) for the quarter it belongs to, because the W-3 and the 941s must still agree.

07W-2 or 1099#

The form follows the relationship, not the preference. A worker whose work you control, on your schedule, with your tools, as an ongoing part of the business, is generally an employee under the IRS’s common-law test and gets a W-2. Several states apply stricter tests, California’s ABC test being the best known. Paying an employee on a 1099 doesn’t make them a contractor; it makes the company liable for the employment taxes it didn’t withhold or pay, with penalties.

08What to do before December 31#

The fixes are cheap before the last payroll of the year and expensive after it:

• Confirm every employee’s legal name, SSN and home and work state with the provider.
• List anything paid outside payroll this year (stipends, bonuses, reimbursements without receipts) and run it through a final payroll as taxable wages if it is.
• Ask your equity administrator for every nonstatutory option exercise and disqualifying disposition of the year.
• Report the year’s group-term life insurance over $50,000, HSA employer contributions and any QSEHRA payments to the provider.
• Reconcile year-to-date wages and withholding in payroll to the general ledger and to the first three 941s.