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Payroll in Practice: 1.17.2022

Jan. 18, 2022, 3:48 PM

Question: We need to file a prior year Form W-2 for an employee. The online Forms W-2 and W-3 state that the forms are for information only and cannot be used for filing purposes. Where can we get prior-year forms?

Answer: According to the IRS, Copy A of Form W-2 found on the IRS website should not be reproduced or used for filing because the official printed versions of the forms include features that enhance machine readability, such as special paper and ink. For paper filing, employers must use Copy A of either the official or approved substitute forms.

The IRS has PDF copies of Forms W-2 on its prior-year tax forms webpage that go back as far as 1954. However, more recent forms are labeled “Info Copy Only.” Forms labeled for information only cannot be used for filing purposes and must be ordered from the IRS. The SSA indicates that paper returns may be filed for tax years 1978 to present.

The IRS carries a supply of prior-year information return forms that can be ordered online or by calling toll-free 800-829-3676.

An alternative to paper filing is to use the Social Security Administration’s Business Services Online (BSO) to file the returns electronically. The SSA’s Electronic Filing W-2 User Handbook indicates that the Forms W-2 / W-3 Online function can be used to prepare, print, and e-file Forms W-2 for the current and prior three years.

For example, during 2021, Forms W-2 for 2018 through 2021 can be prepared and e-filed, and employee copies printed, using Forms W-2/W-3 Online.

The other method of e-filing is to upload a Formatted Wage File. The employer may create the file without special software. The file is a flat file in text format. The specifications are available in SSA Publication No. 42-007, Specifications for Filing Forms W-2 Electronically.

The Upload Formatted Wage File method may be used to file W-2 Forms for tax years 1978 to present; however, it will not generate the employee copies of the forms. The employee copies of the online forms from the IRS website may be used to prepare copies to furnish to employees.

Question: An employee has pretax premiums deducted for short-term disability insurance. The employee became sick and received a check from the insurance company, which did not withhold income taxes. Does this amount need to be reported on the W-2?

Answer: Yes. When an employee pays for disability insurance on a pretax basis, the amount of benefits the employee received is taxable income and is reported as wages on Form W-2. However, the way it is reported depends on the relationship between the employer and the third-party payer – specifically, whether the third party is acting as an agent of the employer.

The premiums are considered paid by the employer because the employee paid the insurance premiums on a pretax basis. Thus, the benefit payments are taxable to the employee for income tax and are taxable to the employee and the employer or third party for Social Security and Medicare taxes for the first six months of continuous disability. This is covered extensively in IRS Publication 15-A, Employer’s Supplemental Tax Guide, as well as the instructions for Forms 941, Employer’s Quarterly Federal Tax Return, and W-2, Wage and Tax Statement.

Third-party agent of the employer

Sick pay paid by the employer or the employer’s agent is subject to mandatory income tax withholding based on the Form W-4, Employee’s Withholding Certificate, filed with the employer. If the sick pay is paid by the employer’s agent, the sick pay is considered supplemental pay, and the agent may elect to use the optional flat supplemental rate even though the agent has not paid regular wages to the employee.

When a third-party agent is to withhold tax from the payments it may also assume responsibility for depositing and reporting the withheld tax. When the third party assumes those responsibilities, it uses its own tax ID number and name rather than the employer’s ID and name.

The sick pay paid by the employer or the employer’s agent may be reported in a separate Form W-2 or combined with other wages in a single W-2. The amount of sick pay subject to income tax is reported in Box 1, the amount subject to Social Security tax in Box 3, and the amount subject to Medicare tax in Box 5. The taxes withheld are reported in Boxes 2, 4, and 6 respectively. If the sick pay is subject to state and local taxes and withholding, the amounts should be included in the appropriate boxes.

If the employee premiums were paid with after-tax dollars, some or all of the sick pay is not subject to tax depending upon whether the employer made the premium payments. The amount that is not taxable should be reported on Form W-2 in Box 12 with Code J and should not be included in Boxes 1, 3 and 5. In Box 13, third-party sick pay should be checked only if a third party paid the benefits.

Third party, but not an agent of the employer

Sick pay paid by a third party that is not acting as an agent of the employer is not subject to mandatory withholding. A third-party payer that is not an agent of the employer is not required to withhold income tax unless the employee provides the payer with a Form W-4S, Request for Federal Income Tax Withholding From Sick Pay.

If the third party does not act as the employer’s agent, it is considered an employer and is responsible for withholding and paying the taxes under its own name. It also issues its own Form W-2. The employer is responsible for letting the third party know the employee’s year-to-date earnings, for purposes of the Social Security wage limitation, and the date the employee last worked, for purposes of the exemption of the sick pay from Social Security and Medicare taxes after the employee has not worked for six months.

Sick pay paid by a third party that is not the employer’s agent is reported separately (i.e., not combined with other wages) by the third party, but special rules are involved. If the third party does not transfer liability to the employer, the third party issues the Form W-2 and files Forms 941 and 940 under its own name and tax ID number. The employer has no tax responsibilities for the sick pay, and Form 8922, Third-Party Sick Pay Recap, is not required.

The third party may transfer liability for the employer’s taxes to the employer by taking the following steps:

  • Withhold employee Social Security and Medicare taxes from the sick pay payments;
  • Timely deposit the withheld employee taxes;
  • Timely notify the employer of the payments and withholding for the payments subject to tax so that the employer may make timely deposit of the employer’s taxes.

If the third party transfers liability to the employer for the employer’s share of Social Security and Medicare taxes and for the FUTA tax, a special adjustment must be made on Line 8 of Form 941, because the Social Security and Medicare taxes are split between the third party and employer based on the employee and employer shares. The third party must also file Form 8922, Third-Party Sick Pay Recap, to report the sick pay it paid for or on behalf of the employer.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com

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