Payroll in Practice: 10.23.2023

Question: An employee worked briefly for an employer but did not provide a Social Security number. What are the employer’s obligations?

Answer: When a worker qualifies as a common-law employee, the employer must treat the worker as an employee. Under the Fair Labor Standards Act and state wage and hour laws, employees must be paid timely for work performed, even if they fail to provide a Social Security number or are not eligible for employment in the United States.

The employer must make a reasonable effort to pay the employee. In some states, if the employee is fired, the employee must be paid at the time of termination. If the employee quits, the employer usually has some additional time to make payment.

If the payroll system does not allow a payment to be processed without an SSN, the payment might have to be processed manually and recorded by adjusting journal entries. The employer must process the wage payment and pay the employee within the timely payment period to avoid penalties under state wage and hour laws.

Taxes should be withheld and timely deposited according to the procedure used when an employee fails to provide a valid Form W-4, Employee Withholding Certificate. That is, Social Security and Medicare taxes should be withheld and income tax withheld as if the employee provided a current Form W-4 that claimed “single or married filing separate” marital status with no entries in steps 2, 3, and 4.

At the time of termination, an employer might pay the employee cash sufficient to cover any unpaid wages. If taxes were not withheld from the payment, the employer should gross up the cash amount to meet the withholding requirements for income, Social Security, and Medicare taxes.

If the employer is unable to locate the employee to make the payment, the employer should prepare a check for the net pay due to the employee and hold it until the employee can be located. This sets the wage expense and tax liabilities in the correct pay and accounting periods for reporting purposes.

The check can be cancelled by converting the credit to the checking account to a credit in a wages payable account on behalf of the employee. This removes the check from the bank reconciliation while the payroll transaction and the liability to the employee are preserved. Once the employee is located, a replacement check can be generated for the net pay. The replacement check is not a new payroll transaction, and no taxes should be withheld.

Generally, if the employer is unable to pay the employee within the period specified in the state’s escheats laws, the employer is required to turn the funds over to the state unclaimed property division. This relieves the employer of liability to the employee. The employee must file a claim with the state to recover the funds.

In most cases, a Form W-2, Wage and Tax Statement, will have to be filed. There are limited cases when a W-2 does not have to be filed. For example, this might occur if the employer was not required to, and did not, withhold any income, Social Security, or Medicare taxes and the employer paid the employee less than $600. If a Form W-2 is required and no SSN is available, the employer will have to submit it without the SSN. If filed electronically, the number is reported as all zeros.

The IRS may propose a penalty for the missing information. The penalty for 2022 W-2 Forms that are not corrected by Aug. 1, 2023, is $290 per form. This will increase to $310 for forms required to be filed in 2024.

If the termination occurred in 2023, it may be advantageous to furnish the Form W-2 to this employee before year-end. If the employee provides the SSN before Jan. 31, 2024, the employer may be able to file a correct form.

If the form is not corrected, the employer may receive Notice 972CG, Notice of Proposed Civil Penalty.

When determining whether to pay a penalty or request a waiver, employers should review the process that allowed the failure to occur and consider making changes to prevent such failures in the future. For example, an employer might establish a policy and procedure that a request for Form W-4 is made and documented at the commencement of employment.

The best defense from IRS penalties is to establish reasonable cause for the failure. In the case of a missing SSN the employer must have exercised due diligence with respect to obtaining it. The failure cannot be due to willful neglect, and the employer must have acted in a responsible manner both before and after the failure.

When seeking evidence of a reasonable cause, the IRS requires examples of significant mitigating factors such as a history of filing correct information returns, and evidence that the failure was due to events beyond the employer’s control. For example, showing that the employee did not provide a correct Social Security number in response to the employer’s request would generally suffice as evidence that the failure was outside the employers’ control.

The employer must also be able to show that steps were taken to obtain the number. This includes the initial request for the completed Form W-4 at the commencement of employment and, if required, reasonable follow-up requests. This solicitation process is the key to establishing reasonable cause to avoid penalties.

Form W-4, as a matter of policy, should be obtained prior to the worker performing services. Completion and provision of Form W-4 does not require any supporting documents. If the employee does not know their SSN, the request for the number can still be documented by the employer.

IRS Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs on Information Returns, covers the requirements for establishing reasonable cause in detail. While the publication’s primary focus is related to information returns such as Forms 1099, there is a section covering Form W-2.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

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

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