The IRS released a draft Form W-2 for 2026 earlier this year, and while it is not yet final, it signals changes that employers should be watching. The draft introduces new reporting codes and fields that do not appear in prior W-2 versions. The IRS has stated explicitly that employers should not implement changes based on the draft form alone, but payroll professionals and HR support teams who review it now will be better positioned to implement updates quickly once the final form is released.

For most small employers, W-2 preparation is handled by payroll software, a payroll service, or a PEO. The risk is not in filling out the form manually. The risk is in the underlying data: incorrect benefit elections, unreported fringe benefits, coding errors on health plan contributions, or employer contributions to HSAs that were not properly tracked through payroll. When that data is wrong, the W-2 is wrong, and the correction process is time-consuming and creates exposure with both the IRS and employees.

The Payroll Accuracy Problem That Creates W-2 Errors

W-2 errors almost always trace back to payroll data problems that accumulated during the year. The most common sources are:

- HSA employer contributions that were recorded outside of payroll and not reported in Box 12 with Code W
- Taxable fringe benefits, such as personal use of a company vehicle or employer-paid group life insurance over $50,000, that were not added to wages through payroll
- Dependent care FSA contributions that exceeded the annual maximum and were not flagged
- State and local tax withholding errors for employees who worked in more than one state during the year
- Incorrect Social Security numbers or name mismatches that cause IRS reject notices at filing

Each of these errors requires a corrected W-2c after the fact. The IRS charges penalties for late or incorrect W-2s on a per-form basis: $60 per form if corrected within 30 days, $130 if corrected between 30 days and August 1, and $330 per form if not corrected by August 1 or if the error is due to intentional disregard. For a business with 50 employees and multiple W-2 corrections, that exposure adds up quickly.

Mid-Year Is the Right Time to Audit Payroll Data

Most employers wait until December to think about W-2 accuracy. The better approach is a mid-year payroll audit, typically in June or July, when there is still time to correct ongoing issues before they compound through the rest of the year.

A mid-year payroll compliance audit should cover:

- Confirm that all benefit deductions in payroll match the elections on file from open enrollment
- Verify that employer HSA contributions are being reported through payroll, not just deposited directly to the account
- Review any employees who have worked in multiple states and confirm that state withholding reflects actual work locations
- Check that any fringe benefits provided year-to-date have been added to taxable wages appropriately
- Confirm that all new hires have valid Social Security numbers on file and that they match payroll records

For businesses using a professional employer organization, these reconciliations are typically handled as part of the payroll compliance service. For businesses managing payroll internally or through a basic payroll software subscription, the mid-year audit is usually a manual process that falls to whoever owns payroll, which is often someone who also has a different primary job.

HR outsourcing and fractional HR arrangements often include access to payroll compliance expertise that small employers would not otherwise have on staff. The cost of finding a W-2 error in June is a simple correction. The cost of finding it in February, after forms have been distributed and filed, is significantly higher.

This month, pull last year's W-2s and compare Box 12 codes against your current payroll setup, then identify any benefit contributions or fringe benefits being tracked outside of payroll that should be running through it instead.

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