IRS Releases Publication 957 (1/2013), Reporting Back Pay and Special Wage Payments to the Social Security Administration

Future Developments

For the latest information about developments related to Publication 957, such as legislation enacted after it was published, go to http://www.irs.gov/pub957.

Introduction

The Social Security Administration (SSA) has special rules for back pay awarded by a court or government agency to enforce a worker protection statute (law). The SSA also has rules for reporting special wage payments made to employees after they retire. These rules enable the SSA to correctly compute an employee's benefits under the social security earnings test. These rules are for social security coverage and benefit purposes only. This publication, written primarily for employers, discusses back pay under a statute and special wage payments. It also explains how to report these payments to the SSA. For more information, visit SSA's website at http://www.socialsecurity.gov/employer. To get a copy of Form SSA-131, Employer Report of Special Wage Payments, visit SSA's website at http://www.socialsecurity.gov/online/ssa-131.html.

1. What is Back Pay?

Back pay is pay received in a tax year(s) for actual or deemed employment in an earlier tax year(s). For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. Report all back pay. However, the tax year(s) for which back pay is credited as wages for social security purposes is different if it is awarded under a statute. See Back Pay Under a Statute, later, for more information.

Reporting Back Pay

The Internal Revenue Service (IRS) and the SSA consider back pay awards to be wages. However, for income tax purposes, the IRS treats all back pay as wages in the year paid.

Employers should use Form W-2, Wage and Tax Statement, or electronic wage reports to report back pay as wages in the year they actually pay the employee. The SSA no longer accepts reports on tapes, cartridges, and diskettes.

Example. In 2012, Terry Morris earned wages of $50,000. In the same year, she received $100,000 in settlement of a back pay case against her employer that covered the periods January 2007 through December 2011. Her employer properly reflected social security wages of $110,100 and Medicare wages of $150,000 on her 2012 Form W-2.

However, if an employer did not include back pay wages on a previously filed Form W-2, magnetic media, or electronically filed wage report, the employer should prepare a wage correction report, Form W-2c, Corrected Wage and Tax Statement, or electronically filed report, to add the back pay award to the wages previously reported.

Example. If, in the above example, Terry Morris' employer had prepared her 2012 Form W-2 reporting social security and Medicare wages of only $50,000 each, the employer would have to correct that report. A Form W-2c correcting the 2012 Form W-2 would show previously reported social security and Medicare wages of $50,000 and the correct amount of $110,100 for social security wages and $150,000 for Medicare wages.

SSA treatment of back pay under a statute. Under the law, the SSA credits back pay awarded under a statute to an individual's earnings record in the period(s) the wages should have been paid. This is important because wages not credited to the proper year may result in lower social security benefits or failure to meet the requirements for benefits.

However, back pay under statute payments will remain posted to the employee's social security earnings record in the year reported on Form W-2 (or Form W-2c) unless the employer or employee notifies the SSA (in a separate, special report) of the back pay under a statute payment. Then, the SSA can allocate the statutory back pay to the appropriate periods.

If a back pay award is not made under a statute, the SSA credits back pay as wages in the year paid.

If employers do notify the SSA of this payment, they should prepare a special report (with the information noted below) and send it to:

Social Security Administration Attn: CPS Back Pay Staff 03-A-10 6100 Wabash Ave Baltimore, MD 21215

Be sure to send this special report to the above address because the SSA handles it separately from other reports.

TIP: If you paid the back pay award in the same tax year to which it applies, report the wages on that year's Form W-2. No further action is necessary.

Example. In 2012, Judy Wilson received a salary of $30,000 and a back pay under statute award of $2,000 for the period January through June 2012. Her employer properly reported wages of $32,000 for social security and Medicare on her 2012 Form W-2. No further action is necessary.

Information the SSA needs to properly credit back pay under a statute (special report). After you complete the special report, you or the employee should send it to the SSA when or after you submit the Form W-2 (on paper or electronically) to the SSA for the year you pay the statutory back pay to the employee. There is no statute of limitations on the filing of the special report to enable the SSA to allocate the wages. The special report must include the following information.

Back Pay Under a Statute

Back pay awarded under a statute is a payment by an employer following an award, determination, or agreement approved or sanctioned by a court or government agency responsible for enforcing a federal or state statute that protects an employee's right to employment or wages.

Examples of pertinent statutes include:

CAUTION: Back pay awards, under some of the statutes listed above, may be compensation for personal injury and not pay for employment. Such awards are not wages for social security coverage purposes.

If a court-approved or sanctioned settlement agreement states that the agreement is not an admission of discrimination, liability, or act of wrongdoing, the statement does not change the nature of a back pay award. The payments made in such a settlement may still be back pay and wages under the rules discussed here.

Nonstatutory Back Pay

A payment for back wages negotiated between an employer and employee without an award, determination, or agreement approved or sanctioned by a court or government agency, the payment is not made under a statute. Delayed wage payments and retroactive pay increases resulting from union negotiation or payments under local ordinances or regulations are back pay and are wages. However, they are not payments made under a statute.

If you are uncertain whether the back pay award was under a qualified statute, you may need to contact your personnel department or legal counsel or the attorney who filed the suit.

Format for Report to the SSA

Use the format shown in Table 1, later, to send the SSA the information needed to properly credit back pay under a statute.

Table 1. Format for Report (Under Covering Letter) to Request SSA to Allocate Back Pay Under Statute Wages

 Employer's EIN: xx-xxxxxxx

Questions

If you have questions concerning back pay under a statute, call the SSA at 1-800-772-6270.

Exception. If you are a state or local government employer who was covered by an agreement under Section 218 of the Social Security Act before January 1, 1987, and you paid a back pay award before January 1, 1987, which you did not report to the SSA, contact your state Social Security Administrator's office.

If the state Social Security Administrator's office needs more information, they can contact the SSA at the following address:

Social Security Administration Office of Income Security Programs Office of Earnings and Program Integrity Policy 6401 Security Boulevard 2506 OPS Baltimore, MD 21235

2. Special Wage Payments

A special wage payment (SWP) is an amount paid by an employer to an employee (or former employee) for services performed in a prior year. Employers should report to the SSA special wage payments made to employees and former employees who are recipients of social security retirement benefits. Special wage payments made to a retired employee receiving social security or to an employee who continues to work while receiving social security benefits may reduce the benefits the individual receives if not reported to the SSA. Special wage payments may include (but are not limited to):

Earnings Test. Benefits paid to a social security beneficiary under full retirement age may be reduced if the beneficiary continues to work. The SSA uses the information in boxes 1, 3, and 5 of Form W-2 to determine the beneficiary's current year earnings. Special wage payments, which are for services performed in a prior year, will increase the current year earnings on Form W-2, which also may result in a reduction in the beneficiary's benefits. If a benefit is reduced because of a special wage payment, the beneficiary must get documentation from the employer before the SSA can restore the deducted portion. Therefore, employer reports of special wage payments help prevent incorrect benefit reductions.

Reporting Special Wage Payments

Employers must report special wage payments for income tax purposes and social security and Medicare taxes in the year received. Report income, social security, and/or Medicare taxes for special wage payments on Form W-2.

CAUTION: See Nonqualified Deferred Compensation and Section 457 Plans, later, for reporting nonqualified deferred compensation plan deferrals and payments on Form W-2.

In addition, report to the SSA special wage payments made during the reporting year to retired employees and employees who continue to work while receiving social security benefits. Submit reports after the close of the tax year. To avoid delays in processing, submit reports in time to reach the SSA by April 1. Use one of the following reporting methods.

Electronic reporting. Special wage payment files can be sent electronically by logging onto Business Services Online (BSO) via the socialsecurity.gov website. BSO enables organizations and authorized individuals to conduct business with and submit confidential information to the Social Security Administration. You must register to use this website. The web address is http://www.socialsecurity.gov/bso/bsowelcome.htm.

Use the specifications and record layout shown in Table 2, later. Only one file at a time may be submitted. If your file is large (>10MB), or you have a slow internet connection, the transmission will be faster if the file is zipped. A zipped file contains a file that has been compressed to reduce its file size. WinZip and PKZIP are examples of acceptable compression packages.

Electronic submissions not meeting the specifications in Table 2 will be rejected.

Table 2. Specifications for Electronic Reporting of Special Wage Payments

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Form SSA-131. Use Form SSA-131 to report special wage payments made to an employee. Also use this form to report nonqualified deferred compensation and section 457 plan deferrals and payments that could not be reported in box 11 of Form W-2.

Table 3. Sample -- Paper Listing for Reporting Special Wage Payments to Several Employees

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Reporting Nonstatutory (Nonqualified) Stock Options as Special Wage Payments

A nonstatutory (nonqualified) option to purchase stock which is exercised in a year after the year in which the option was earned is a special wage payment. It should not count for the social security earnings test. Nonstatutory (nonqualified) options exercised as special wage payments by retired employees or employees who continue to work while receiving social security benefits should be reported by employers using the above reporting methods.

Nonqualified Deferred Compensation and Section 457 Plans

A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan. For social security and Medicare purposes, deferred compensation plans for employees of state and local governments (section 457 plans) are treated the same as nonqualified plans. Nonqualified and section 457 plans are reported differently than other special wage payments. See Reporting Amounts Deferred to Nonqualified and Section 457 Plans below for specific instructions.

Reporting Amounts Deferred to Nonqualified and Section 457 Plans

Generally, when the related services are performed, non-qualified deferred compensation is subject to social security and Medicare tax when deferred. However, if nonqualified and section 457 plans contain provisions that delay the employee's right to receive payments from the plan, a period of substantial risk of forfeiture exists. The plans' deferrals, or contributions, are not subject to social security and Medicare taxes until the period of substantial risk of forfeiture ends.

No risk of forfeiture. If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation or section 457 plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2.

Example. Company X's nonqualified deferred compensation plan allows the deferral of up to $20,000 of employee salaries each year. The plan has no risk of forfeiture. In 2012, Employee A defers $20,000 to the plan from a total salary of $200,000.

 Form W-2 Completion                             Amount

Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. If the employee continues working, future deferrals are social security and Medicare wages when they are earned.

CAUTION: Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services.

Risk of forfeiture lapses at retirement. When an employee's right to a payment is contingent upon working until retirement, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, as social security and/or Medicare wages in the year of retirement. Add the amount to other wages paid in that year, and enter in box 3 (up to the wage base maximum) and/or box 5 of Form W-2.

Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture.

CAUTION: Do not include in box 11 deferrals that are included in boxes 3 and/or 5 and that are for current year services.

Example--risk of forfeiture. At the end of the risk-of-forfeiture period for Company Y's nonqualified deferred compensation plan, Employee B's accumulated deferrals, plus interest earned by the plan, are $120,000, not including B's $20,000 deferral for this year. B's wages, including this year's deferred amount, are $80,000.

 Form W-2 Completion                              Amount

Example. Employee D retired from the XYZ company and began receiving social security benefits. XYZ paid D a $12,000 bonus upon retirement for sales made in a prior year, and D received $25,000 in payments from XYZ's nonqualified deferred compensation plan. In addition, D agreed to continue performing services for XYZ, but on a part-time basis for wages of $15,000 per year. D made no deferrals to the nonqualified plan this year.

 Form W-2 Completion                              Amount

Example. Employee K retired this year from Company XYZ and began receiving social security benefits. During the year he earned wages of $50,000 and deferred $35,000 of the wages into the company's nonqualified deferred compensation plan. K also received $75,000 in payments from the company's nonqualified plan.

 Form W-2 Completion                                       Amount

It is not necessary to show amounts deferred during the year under an NQDC plan subject to section 409A. If you report section 409A deferrals, show the amount in box 12 of Form W-2 using code Y. For more information, see Notice 2008-115, 2008-52 I.R.B. 1367, available at http://www.irs.gov/irb/2008-52_IRB/ar10.html.

Special reporting rules apply when an NQDC plan is not compliant with section 409A (when there has been a "plan failure"). Income included under section 409A from an NQDC plan is reported in box 1 and box 12 of Form W-2 using code Z. See Notice 2008-115.

The following examples use small dollar amounts for illustrative purposes. However, the amount reported in box 3 of Form W-2 is always limited by the social security earnings wage base (for example, $110,100 for 2012). The term "vested" in the following examples means that the amount deferred is not subject to a substantial risk of forfeiture. Conversely, the term "not vested" means that the amount deferred is subject to a substantial risk of forfeiture. The examples assume that the NQDC plan is in compliance with section 409A, and that amounts deferred under the plan are not includible in gross income as they are deferred. For purposes of the examples, it is assumed that the regular pay of the employee is remuneration for employment and wages for employment tax purposes except to the extent the deferral of a portion of the regular pay results in a reduction in wages.

Example 1: Deferral that is immediately vested (no substantial risk of forfeiture) with no distributions and no vesting of prior-year deferrals. For the year, the employee's regular pay was $200, and the employee deferred $20 of the pay into her employer's NQDC plan. The deferral of $20 was vested upon deferral and there was an employer match of $10 under the plan, which was also vested.

Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10.

 Form W-2 Completion                                        Amount

Regular pay = $200; Deferral, not vested = $20; Employer match, not vested = $10.

 Form W-2 Completion                                        Amount

Regular pay = $200; Deferral, vested = $20; Vesting of prior-year deferrals = $100; Vesting of investment earnings on $100 of prior-year deferral = $15.

 Form W-2 Completion                                          Amount

Regular pay = $100; Distribution = $50.

 Form W-2 Completion                               Amount

* Generally, the amount earned by the employee during the tax year for purposes of item 6 of Form SSA-131 is the amount reported in box 1 of Form W-2 plus current-year deferrals that are vested (employee and employer portions) less distributions. Do not consider prior-year deferrals that are vesting in the current year. If there was a plan failure, the box 1 amount in this calculation should be as if there were no plan failure.

Example 5: Deferral that is immediately vested and there are distributions (no vesting of prior-year deferrals). For the year, the employee's regular pay was $200, and the employee deferred $20 of the pay into the employer's NQDC plan. There was also an employer match of $10. The deferral and employer match were vested upon deferral. There was no vesting of prior-year deferrals under the plan. During the year, there were total distributions of $50 from the plan to the employee.

Regular pay = $200; Deferral, vested = $20; Employer match, vested = $10; Distribution = $50.

 Form W-2 Completion                                          Amount

Regular pay = $200; Deferral, not vested = $20; Distribution = $50.

 Form W-2 Completion                                        Amount

Regular pay = $200; Deferral, vested = $20; Distribution = $50; Vesting of prior-year deferrals ($100) and earnings on those prior-year deferrals ($15) = $115.

 Form W-2 Completion                                             Amount

Regular pay = $200; Deferral, not vested = $20; Distribution = $50; Vesting of prior-year deferrals and employer match = $100 plus earnings on that $100 of $15.

 Form W-2 Completion                                             Amount