What is a W-2 form? A guide for small business owners

Published Friday 26 September 2025

Table of contents

• What is a W-2 tax form?
• What is the purpose of a W-2?
• What is the purpose of a W-2?
• The W-2 tax form explained – what's on the form?
• How to prepare and file employee W-2 forms
• Avoid common mistakes with W-2 forms
• Let Xero help you nail your payroll
• FAQs on W-2 forms for employees

Key takeaways

• W-2 forms show employee earnings and withholdings.
• Employers must file W-2 forms each year by January 31 (or the next business day).
• Send copies to your employees, the Social Security Administration, and your state or local government if you withhold local taxes.
• You could be fined (quite heavily) if you don’t file W-2 tax forms on time.
• Payroll software like Xero can automate your payroll filing.

What is a W-2 tax form?

A W-2 form shows the IRS:

• How much you’ve paid an employee throughout the year
• The amount of taxes withheld from their pay
• Any other taxable or non-taxable payroll deductions, including state income taxes, retirement contributions, and health insurance premiums.

You need to generate these forms each year and send copies to each employee, the Social Security Administration, and your state or local government, if applicable.

What is the purpose of a W-2?

You use W-2 forms for tax purposes. They show employees how much income to report on their tax returns and the work-related deductions they can take – like certain retirement contributions. Employees can use their W-2s as proof of income for loans or social assistance programs.

These forms are also important for small business tax prep – they help you calculate the wages deduction for your business tax return.

The W-2 tax form explained – what's on the form?

W-2s include your employee's name and Social Security Number, your business's name, tax ID number, and contact details. W-2s also include the following in numbered boxes:

• Wages, tips, and other compensation – total gross wages paid to your employee
• Federal income tax withheld – income tax you withheld and sent to the IRS
• Social Security wages – the wage amount subject to Social Security tax, which may be all of the employees' wages or only a portion if some wages are exempt
• Social Security tax withheld – Social Security payments you withheld and sent to the IRS
• Medicare wages and tips – all wages subject to the Medicare tax
• Medicare tax withheld – the Medicare taxes you withheld from the employee’s pay and sent to the IRS
• Tip income – tips reported to the IRS (which are also included in the gross wages in box 1)
• Tips allocated to employees – tips your business allocated to workers but didn't report to the IRS
• Blank – this box is no longer in use (it used to report advanced earned income tax credits paid to employees)
• Dependent care benefits – benefits you paid to your employee for dependent care
• Nonqualified plans – compensation from non-qualified deferred retirement plans, if applicable
• 30 different subcategories paired with identifying letters – this box may include 401(k) or other retirement account contributions, non-taxable sick pay, and taxable group-term life insurance premiums, and other categories of financial benefits
• Retirement plan indicator – tick a box to note if your employee is an active participant in your company's retirement plan
• Other information – including railroad retirement taxes, fringe benefits, union dues, uniform payments, minister's parsonage or utilities allowance
• State and state ID number – the state where the wages were paid and your state tax ID number
• State wages and tips – wages subject to state taxes; typically matches the amount in box 1, but there can be exceptions
• State income tax – state income tax you withheld and sent to the state
• Local wages, tips, etc – wages subject to local income tax if applicable in your area
• Local income tax – income tax that you withheld and sent to your local government.
• Locality name – the name of the locality where you paid local income tax.

Depending on the benefits you offer your employees, you may only need to fill in the first six boxes and the state/local boxes if applicable. However, if your state doesn't have income tax, you don't need to complete any of the state-related boxes. Similarly, you only need to fill in the local wages and taxes boxes if you're in an area that assesses a local income tax.

How to prepare and file employee W-2 forms

As an employer, you must prepare W-2 tax forms (and a W-3) at the end of every calendar year. You then give a copy of the form to your employees and file copies with the relevant government authorities.

Take a look at the process.

Preparing W-2 tax forms

To prepare W-2 forms for employees, you need all the information above. You can then either:

• Order forms from the IRS to fill out manually
• Use a W-2 generator online
• Have your payroll software create the forms

If you fill out the forms on your own or use a W-2 generator, you'll have to manually copy over the numbers from your payroll software, payroll tax returns, or other records – which can take time and cause errors. Payroll software like Xero calculates everything for you automatically, saving time and improving accuracy.

Remember to complete a W-3 as well

The W-3 form summarizes the details on your W-2 forms and acts as a cover sheet. It has the same setup as the W-2 tax forms, but instead of putting individual employee details on it, you include the total wages and withholdings of all your employees in the corresponding boxes.

Check out the IRS website for details on how to order forms and publications.

W-2 filing deadlines

By January 31 following the year wages were paid, you need to:

• Send copies of the W-2s to the Social Security Administration (SSA) and your state or local government, if applicable
• Give the W-2 forms to your employees. You can either hand-deliver forms to employees or postmark them by this deadline.

If January 31 falls on a weekend or holiday, the forms are due the next business day. For example, you need to report wages paid from January 1 to December 31 2025 by February 2 2026. This is the deadline to e-file or mail returns to the SSA and your local government.

How to file your W-2 forms

You need to file W-2s with the SSA and, if you withhold state or local income taxes, with your state or local government.

• You can mail the returns to the SSA if you have fewer than 10 forms or have received an exemption. Otherwise, you need to file the W-2s electronically. Use the SSA’s Business Services Online to e-file W-2s, or use a W-2 generator or payroll software (like Xero) that can e-file these forms for you.
• If you also need to file with the state or local government, check with your state's revenue department or your local government for guidelines. Most states accept mailed forms under a certain number (for example, in Colorado, you must efile if you have more than 10 W-2s)but require e-filing for all employers over that threshold. Again, you can do this process manually or let your payroll software handle it.

Avoid common mistakes with W-2 forms

Make sure you file the right forms the right way to comply with the payroll filing rules.

Use up-to-date forms

W-2 tax forms get updated when there are major changes to the tax code, such as no taxes on tips and changes to overtime pay may lead to changes in the form for the 2025 tax year and beyond.

Filing forms online

Small business payroll rules and taxes are complicated. To minimize the risks of mistakes, you should avoid manual processes and automate as much as possible.

Mailing in the right forms

If you qualify to mail forms to the SSA, use the right forms in the correct colors or they could be rejected.

Hit your filing deadlines

You could be fined for missing deadlines by even a day and they can rise rapidly.

Pay W-2 employees the correct rate

The IRS has specific rules on the differences between employees’ and contractors’ pay. So make you sure you understand the distinctions and pay your workers properly.

For more info on payroll compliance, check out the Department of Labor website for details and links to more resources.

The IRS also has resources about the W-2.

Let Xero help you nail your payroll

You don't have to handle payroll on your own. Xero payroll software streamlines this process for you – it lets you collect W-4 and state tax forms electronically, then automatically calculates the payroll tax and files the forms for you.

Options like Gusto payroll software syncs with your Xero bookkeeping software, so you never miss a deduction or filing deadline.

Get one month free.

FAQs on W-2 forms for employees

Do you have more questions about what is a W-2, why it's important, or how to file it? Then, read on.

Who needs to file W-2 forms?

If you’re an employer who paid wages during the previous financial year, you need to file W-2 forms. You file one W-2 form per employee, and also a W-3 form with the totals from all the W-2 forms.

What is a W-2 employee?

A W-2 employee is a worker who’s employed by a company, other than freelancers or 1099-contractors. Employees work for the company – you dictate what they do, when they do it, and how they do it. Freelancers run their own businesses, and you pay for their services. They typically provide their own tools and expertise.

The IRS has a more detailed breakdown of the differences.

What's the difference between a 1099-NEC and a W-2 form?

A W-2 form shows wages paid to an employee, while a 1099-NEC form shows the compensation you paid to a contractor. W-2 forms tend to be more complicated as you must withhold taxes from your employees' pay and may need to report benefits or retirement contributions as well.

In contrast, 1099-NECs typically just report the amount you paid the contractor, except in rare cases where you need to withhold tax.

Do I need to file a W-2 form if I paid my employee less than $600?

Only if you withheld taxes. If you didn't withhold taxes and you paid an employee less than $600, you don't need to file a W-2 for that employee – but that's unlikely, as most employers are required to withhold taxes from most of their employees’ pay.

What is the penalty for filing W-2 forms late?

As of 2025, the penalty is $60 per form. That rises to $130 per form if you're more than 31 days late and $330 per form if you file after August 1.

There’s also a $660 fine per form if you intentionally disregard the law. Penalties grow quickly (for instance, if you're 2 months late generating W-2s for 10 employees, your penalty will be at least $1300) so file your W-2s on time!

How does a W-4 relate to a W-2 form?

Employees fill out W-4s to share information about their filing status, dependents, and other income with you. You then use this information to work out how much tax to withhold from their pay, which you enter on their W-2 form, which summarizes all the employee's payments and withholdings at the end of the year.