**Bonuses, W-2, 1099, and Avoiding IRS Errors**

The end of the year is approaching, and if you have employees or contractors, you're probably already hearing words like “bonus,” “W-2,” “1099,” and “withholdings.” Closing your payroll is a legal and tax obligation that can bring you benefits… or problems if not handled properly.

In this blog, we explain what it means to properly close your payroll, how to handle December payments, and why a mistake can cost you more than you imagine.

Year-End Bonuses

Giving a year-end bonus is an excellent way to recognize your employees' efforts. But from a tax perspective, it is income that must be reported as part of wages.

This means that if you decide to pay someone a bonus, you must include it in their last payroll of the year and apply the same withholdings you would for any regular salary payment: federal taxes, Social Security, Medicare, and state taxes (if applicable).

Many business owners believe that by giving the bonus in cash or as a gift card they can avoid this step, but that is a mistake. Any form of compensation with economic value is considered income and must be reported. Even if you give someone $100 on a gift card, legally it is taxable income.

It is essential to consult with your trusted accountant or CPA to define the best withholding and reporting strategy for bonuses to the IRS. At Jambrina CPA, we help you do it simply and effectively.

Form W-2: The Most Important Form of the Year

Form W-2 is the official document that shows how much your employees earned during the year and how much was withheld in taxes. It is mandatory for anyone who worked with you as an employee, regardless of whether they only worked one month or no longer work with you.

This form must be delivered to the employee and reported to the IRS no later than January 31 of the following year, meaning you have until January 31, 2026, to send the W-2 Forms corresponding to the year 2025.

The form includes not only base salary but also bonuses, reported tips, retirement plan contributions, and any other taxable income. In addition, it is essential that all information is correct: names, Social Security numbers, and addresses. A single error can cause delays, frustration for your employee, and fines for you.

Did You Pay Someone Outside Your Payroll? Submit Form 1099-NEC

If you hired an external person for professional services, such as graphic design, social media, cleaning, maintenance, or consulting, and paid them $600 or more during the year, you probably need to issue them a Form 1099-NEC.

This form is different from the W-2 Form because it applies to independent contractors and not employees. But be careful: you can't decide who is a contractor just because you don’t want to pay taxes for them. The IRS has clear criteria to determine whether a person should be classified as an employee.

For example, if you tell the person how, when, and with what tools to do their job, that already suggests an employment relationship. And if you issue a Form 1099 to someone who is actually an employee, you could face penalties for misclassification.

Just like the W-2 Form, the 1099 Form must be sent to the worker and the IRS before January 31, so it is crucial to have all the data in order before December ends.

What to Do Before Closing Your Payroll?

Beyond issuing the correct forms, year-end is the ideal time to do a complete review of your payroll system.

Make sure that all payments made during the year are recorded, including any reimbursements, reported tips, vacation or leave pay, checking that there are no duplicates or missing entries.

Validate that all data for your employees and contractors is updated and error-free. Misspelled names or incorrect Social Security numbers can cause many headaches when issuing forms.

Verify that your reports and your deposits to the IRS (Forms 941, Form 940) match the payroll paid. If, like us, you use software like QuickBooks, you can generate preliminary reports to confirm everything is aligned.

What About Deductions?

Although most small businesses use the standard deduction on their return, if your payroll expenses were high, you may consider itemizing them.

For example, wages, payroll taxes, bonuses, payroll services, and contractor fees are deductible if properly documented. So are software and accounting or tax consulting costs.

A well-managed strategy can help reduce your tax burden and increase your refund (or pay less). That’s why it’s key to consult with your CPA before closing the year.

What Happens If You Do Nothing or Make a Mistake?

The IRS does not forgive negligence.

Issuing forms late, with errors, or misclassifying your team can lead to:

Fines for incorrect or delayed forms

Loss of deductions due to incomplete documentation

Audits and future tax issues

A well-done payroll closing is an investment in peace of mind and legal compliance. And the best part: it positions you to start the new year with clean finances and no loose ends.

Trust Jambrina CPA for Your Payroll Closing

We’ll make sure every cent you paid during the year is well documented and legally in order. A correct closing protects you, your team, and your business.

At Jambrina CPA, we’re ready to help you close your fiscal year without errors, with the full support of a bilingual CPA team with real experience helping businesses like yours, whether in Houston or anywhere in the United States.

Whether you need to issue the W-2 Form, calculate bonuses, review contracts, or generate 1099 Forms, there’s still time to do it right.

Complete Year-End Payroll Guide