W-2 and 1099 Year-End Playbook: A Practical Payroll Checklist for Founders

W-2 and 1099 Preparation: A US Year-End Playbook for Startups

The fourth quarter arrives, and for an early-stage founder, the focus is on hitting targets, not tax forms. Yet, as the year closes, the administrative deadlines of payroll compliance become unavoidable. For startups from pre-seed to Series B, this process is often managed by the founders themselves, armed with QuickBooks and spreadsheets. The pressure is real, because simple mistakes in classifying workers or missing a deadline can lead to IRS penalties that a lean startup cannot afford. Getting this right is not just about compliance; it is about maintaining trust with your team and protecting your runway. This playbook provides a clear, step-by-step guide for US companies on how to file W-2 and 1099 forms, turning a source of anxiety into a manageable, repeatable process. This is your year-end payroll checklist, designed for the realities of startup payroll.

Foundational Understanding: W-2 vs. 1099-NEC

At its core, year-end tax reporting is about documenting who you paid and how much. The forms differ based on the worker’s relationship to your company. Understanding this distinction is the foundation of payroll compliance in the USA and the first critical step in your process.

Form W-2, Wage and Tax Statement, is for employees. It reports not only their annual wages but also the amount of federal, state, and other taxes you withheld from their paycheck. This form is a direct reflection of the employer-employee relationship where you control the work and handle tax withholding.

Form 1099-NEC, Nonemployee Compensation, is for independent contractors, freelancers, or vendors you paid for services. This form reports the total amount you paid them during the year. Unlike with a W-2, you generally do not withhold taxes from these payments; the contractor is responsible for their own tax obligations.

The First Decision: How to File W-2 and 1099 Forms Starts with Classification

Before you can file anything, you must correctly classify every person you paid. Misclassifying an employee as an independent contractor is a major red flag for the IRS, potentially triggering audits and steep penalties for unpaid payroll taxes. Getting this distinction right is not subjective; the IRS uses a three-factor test to guide the decision.

1. Behavioral Control

This factor examines your right to direct and control how the worker performs their job. If you dictate their hours, require them to work at your office, provide extensive training on your specific methods, and closely manage their process, they are likely an employee. An employee is integrated into your operational command structure.

A contractor, by contrast, typically controls their own methods, schedule, and location of work. For a SaaS platform, a full-time backend developer working a 9-to-5 schedule on company equipment is an employee. A freelance designer hired for a three-week project to create marketing assets, who uses their own Adobe license and sets their own hours, is a contractor.

2. Financial Control

This factor looks at the business aspects of the worker’s job. Do you control their financial reality? Employees are generally paid a recurring salary or hourly wage, have business expenses reimbursed, and use company-provided equipment like laptops and software licenses. They are not in a position to realize a business profit or loss from their work.

Contractors often have a significant investment in their own tools and can realize a profit or loss on a project. For a professional services firm, a full-time consultant on your payroll is an employee. A specialist attorney hired for a single fundraising round and paid a flat project fee is a contractor.

3. Relationship Type

This factor considers the written and perceived relationship between you and the worker. Do you have a written contract describing the relationship as one of independent work? Or is there an employment agreement? Do you provide employee-type benefits like health insurance, retirement plans, or paid time off?

A key consideration is whether the work is a core part of your regular business and if the relationship is expected to continue indefinitely. The reality for most pre-seed to Series B startups is more pragmatic: if someone works for you exclusively, follows your direction, and is integrated into your team, they are an employee and need a W-2.

The Q4-to-January Startup Payroll Playbook

With your workers correctly classified, the process becomes a clear, three-step sprint from October to the end of January. This timeline is designed to prevent the last-minute scramble that so often leads to errors and missed deadlines. Each step builds on the last, ensuring a smooth W-2 filing process and on-time 1099 reporting.

Step 1: The Q4 Data Audit (Target: November-December)

Incomplete or inaccurate worker data is the primary cause of delays, rejected filings, and correction fees. This audit is your safety net. Before the year ends, your goal is to collect and verify all necessary information for every employee and contractor.

For Employees (W-2)

Your audit should confirm you have the following correct information for every employee:

• Full legal name (as it appears on their Social Security card)
• Social Security Number (SSN)
• Current mailing address

Next, you must audit their total compensation figures. W-2 compensation is more than just base salary. It includes gross wages, bonuses, commissions, taxable fringe benefits, and certain income from stock option exercises, such as disqualifying dispositions of ISOs or exercises of NSOs. A scenario we repeatedly see is founders forgetting to include certain items. For a biotech or deeptech startup, this might include a year-end performance bonus, taxable moving expenses for a key scientist, or the taxable value of a gym membership.

For Contractors (1099-NEC)

For every contractor paid over $600 in a calendar year, you must have a completed Form W-9 on file. The W-9 provides their legal name, business name, address, and Taxpayer Identification Number (TIN), which can be an SSN or an Employer Identification Number (EIN).

The compensation calculation for 1099-NEC contractors is simpler but requires precision. It includes payments for services but does not include reimbursed expenses. For an e-commerce startup using a freelance photographer, you report the fees for the photoshoot, not the money you reimbursed them for travel. Your bookkeeping in QuickBooks must clearly separate these amounts.

Step 2: Generate and Distribute Forms (Target: Mid-to-Late January)

Once your data is clean and verified, you can generate the tax forms. If you use a modern payroll provider like Gusto, Rippling, or Justworks, this process is largely automated. The system will generate W-2s and 1099s based on the payroll data you have run all year. Your primary job is to review the drafts for accuracy before the platform distributes them electronically or by mail.

If your setup is more manual, such as using QuickBooks for bookkeeping and paying contractors via Stripe or bank transfer, you will need a dedicated e-filing service like Track1099 or Tax1099. These tools import data from spreadsheets or accounting software to generate and file the forms electronically. Regardless of the tool, the deadline is firm. All W-2s and 1099-NECs must be sent to recipients (postmarked or electronically delivered) by January 31. Missing this deadline damages trust with your team and can incur penalties.

Step 3: File with the Government (Target: By January 31)

Distributing forms to your team is only half the job. You must also file copies with the correct government agencies. This is a non-negotiable deadline. Government copies of W-2s and 1099-NECs are also due by January 31. Think of this as a dual deadline: one for your people, one for the government, both on the same day.

It is crucial to send the right forms to the right agency. W-2s, along with their summary Form W-3, are filed with the Social Security Administration (SSA). The SSA processes the forms and shares the data with the IRS. 1099-NECs, along with their summary Form 1096, are filed directly with the Internal Revenue Service (IRS). Again, payroll platforms and dedicated e-filing services typically handle this submission for you.

Furthermore, you must distinguish between federal and state requirements. The January 31 deadline is for federal filing. Many states have their own, separate filing requirements and deadlines for W-2s and 1099s. Your payroll provider or accountant can help you navigate these state-specific obligations, which are an essential component of total payroll compliance USA.

Common Sticking Points and How to Handle Them

Even with a solid plan, issues can arise. Knowing how to manage them is key to a low-stress year-end.

One common problem is discovering an error after a form has been filed. If you find a mistake on a W-2, you must issue a corrected form, known as Form W-2c. Similarly, you can file a corrected 1099-NEC. Acting quickly to correct errors demonstrates good faith and can help mitigate potential penalties.

Missing the January 31 deadline is another frequent pain point. IRS penalties for late filing are tiered based on how long the delay is. The penalty amount per form increases the longer you wait, so filing as soon as you realize you are late is the best course of action. What founders find actually works is communicating proactively with their team about any delays, as transparency helps manage expectations and maintain trust.

Finally, there is often confusion over what constitutes 1099-NEC compensation, especially for payments made through third-party platforms. Generally, payments for services are reportable. However, if you pay contractors via a third-party payment network like PayPal or Stripe, that network may be responsible for issuing a Form 1099-K. You should not issue a 1099-NEC for the same payments, as this can lead to double reporting of income for the contractor.

Conclusion: Building a Scalable Year-End Process

Mastering your startup’s year-end tax reporting is a matter of process, not panic. For pre-seed and seed-stage companies, the priority is establishing a clean data-gathering system and correctly classifying every worker from day one. This may begin with a well-organized spreadsheet and a clear process for collecting W-9s before issuing a single payment.

As you grow toward Series A and B, the priorities shift to leveraging payroll platforms like Gusto or Justworks to automate generation, distribution, and filing. These startup payroll tips are designed to scale with you. The core principles remain the same: classify workers correctly using the IRS three-factor test, conduct a thorough data audit in Q4, and adhere strictly to the dual January 31 deadlines. By understanding the distinction between W-2 and 1099-NEC requirements, you build a compliant and efficient year-end process that lets you focus on building your business.

Frequently Asked Questions

Q: What is the minimum payment amount that requires a Form 1099-NEC?

A: You must issue a Form 1099-NEC to any independent contractor you paid $600 or more for services during the calendar year. This threshold applies to the total payments made, not individual invoices. It is best practice to collect a Form W-9 from all contractors, regardless of the expected payment amount.

Q: What happens if a contractor refuses to provide a Form W-9?

A: If a contractor does not provide their Taxpayer Identification Number via a Form W-9, you are required by the IRS to implement backup withholding. This means you must withhold a flat 24% of all payments made to them and remit those funds to the IRS, which can be an administrative burden.

Q: Can I send employee tax forms like the W-2 electronically?

A: Yes, you can distribute W-2s electronically, but you must first obtain your employee’s affirmative consent. The consent must be explicit, and you must inform them of the scope and duration of the consent, how to withdraw it, and provide a clear procedure for requesting a paper copy.

Q: Do I need to file a 1099-NEC if I pay a contractor with a credit card?

A: Generally, no. Payments made via credit card, debit card, or third-party payment networks (like PayPal or Stripe) are classified as Payment Card and Third Party Network Transactions. The payment settlement entity, such as the credit card company, is responsible for reporting these on Form 1099-K, not you on a 1099-NEC.