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Payroll in Practice: 5.4.20

May 4, 2020, 4:03 PM

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

Question: An employee had a student visa exemption from Social Security and Medicare taxes until late 2014, when his visa status changed. We should have started then to withhold the taxes, but did not until mid-2016. In 2017, we prepared corrections using Forms W-2c for 2014, 2015, and 2016.

We recently discovered that the forms were not filed with the Social Security Administration or given to the employee, who had since left the company. The former employee contacted us to say that the SSA had no record of his Social Security earnings for 2014 or 2015, and only partial earnings for 2016. The employee had contacted the IRS and was told that the time for making changes with the SSA had passed. How do we correct this?

Answer: Normally, the period for such corrections is limited to a three-year period after the year the wages were paid, although there are some exceptions. For example, the “Social Security Handbook” offers information for employers that did not report worker wages in a period. Additionally, the Internal Revenue Service provides instructions on preparing and filing Forms W-2c, Corrected Wage and Tax Statement.

You can prepare and submit paper forms yourself, but be sure to use the official forms or authorized substitutes because the machine reader requires the form’s red ink. If you prepare new forms or file electronically, keep the earlier prepared forms as part of your documentation supporting the changes as well as any written correspondence.

An additional concern is whether the Social Security and Medicare taxes were withheld or deposited. If the taxes were deposited, then Form 941, Employers Quarterly Federal Income Tax Return, or Form 941-X, Adjusted Employers Quarterly Federal Income Tax Return, should have been filed. If the taxes were not deposited and reported, prepare a Form 941-X for each of the affected three-month quarters and make the appropriate deposit and file the forms.

If the employee taxes were not withheld but were paid by the employer, the tax amounts that were paid are additional taxable income to the employee for the year the employer paid the tax. For example, if the employer pays the employee’s tax in the current year, the employer will have to issue Form W-2 for the current year to the employee reporting the employer paid taxes as wages including any grossed-up taxes.

If there are tax-deposit complications, it may be a good idea to contact the IRS and ask to work with a revenue officer to remedy the situation. Because of the complicating factors involved in this situation, it might be advisable to provide an enrolled agent, certified public accountant, or lawyer that handles IRS collections issues with a Form 2848, Power of Attorney and Declaration of Representative, to initiate contact with the IRS in resolving the issue.

The employee should be provided with the employee copies of the W-2c and possibly a letter explaining what occurred. The letter can serve as documentation for the employee in filing Form SSA-7008, Request for Correction of Earnings Record.

For more information, obtain SSA Publication No. 05-10081, “How to Correct Your Social Security Earnings Record.”

Question: An employee reported that our company was deducting parking fees from her checks even though she does not work at a location that charges workers to park. Can we refund her the money, and would it be an after-tax deduction?

Answer: You can refund the money. Because she already paid the taxes on the amount, no tax issues are involved. You can either make the payment through payroll or accounts payable. In this case, I would suggest accounts payable to avoid the possibility of having the amount included in gross pay.

If you choose accounts payable, ensure that it is treated as reimbursement of an overpayment so that Form 1099—MISC is not issued in error. The refund is not additional compensation or payment for services as either an employee or a nonemployee; it is not considered other income because it already was taxed as wages.

By Patrick Haggerty

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

To contact the reporter on this story: Patrick Haggerty at phaggerty@prodigy.net

To contact the editor on this story: Michael Trimarchi in Washington at mtrimarchi@bloombergtax.com

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