Awarded Back Pay

[peggysioux]

Taxpayer (local city employee) was awarded a large back pay in 2016 that was for 2014, 2015 and 2016. He was advised by the city that he would be receiving amended W-2's for 2014 and 2015 for portions of the back pay. I was surprised at the handling of the back pay.

Pub 957 states:

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.


Are there certain circumstances where the wages would be correctly reported in the previous years?

Peggy Sioux

[mactoolsix]

The taxpayer should receive a W2c - corrected W2 (not an "amended" W2) which the employer will also send to the IRS.

The taxpayer should report the wages in the year received (2016).

Note the examples in Pub 957 under "Reporting Back Pay" which state the employer must submit a W2-c.

https://www.irs.gov/publications/p957/ar02.html

[Roland Slugg]

If the back pay was awarded under a statute (as opposed to a negotiated bargaining process), the SSA earnings for each of the prior years will be adjusted to reflect the amount that would have been reported on the employee's W-2(s) for those prior years. This is important, as it can affect the calculation of the employee's social security benefit.

For income tax as well as income tax withholding purposes, however, the back pay is taxable in the year it is paid to the employee. This is probably what the City plans to do, but the taxpayer/employee may wish to inquire just to make sure.

You will find this information in IRS Pub 957.

[peggysioux]

Awarded Back Pay

Thank you for explanation. So even though corrected W-2's will be filed for the appropriate years, will the 2016 W-2 for the taxpayer show the total wages (including awarded wages) as well? I am still a little confused.

Thank you for your help.

Peggy Sioux

[Kram BergGold]

Questions Need to be Asked

Either your client is mixed up or the employer does not know what they are doing. You need to speak with the employer.

[mactoolsix]

So even though corrected W-2's will be filed for the appropriate years, will the 2016 W-2 for the taxpayer show the total wages (including awarded wages) as well?

I believe so - see pg 38 of this Guide

https://www.ssa.gov/employer/guidewebnew.doc

"Employers should use Form W-2, magnetic media or electronic wage reports to report back pay as wages in the year the amounts are actually paid to the employee."

Mike

[Roland Slugg]

Either your client is mixed up or the employer does not know what they are doing.

No, the client probably isn't mixed up, and the employer appears to be doing it right. Have you read Pub 957? It's quite interesting.

The employer will only correct the prior years' W-2s to report the back pay attributable to those years as increases in the social security wages for those years. The gross/taxable wages reported on the prior years' W-2s should not be changed. The full amount of back pay paid to the employee in 2016 will be included on his 2016 W-2, including the portions attributable to the prior years. The only effect the corrections should have is on the amounts of social security wages for the prior years.

You need to speak with the employer.

She, Peggy Sioux, needs to do that? Really?

Just curious: I do wonder how the social security tax will be handled. If the employee was under the social security taxable limit in each of the back years, and is also below that limit in 2016, even including the back wages that will be paid this year, the SS tax withholding will be 6.2% on the whole amount. But what if the taxable SS wage limit was reach in one or more of the prior years, but will not be reached this year. Or what about the opposite ... the SS wage limit will be reached this year but was not in the prior years? How much SS tax should be withheld when the back wages are paid in 2016. I didn't see this point covered in Pub 957, although it may be, but I suspect the amount of SS tax withheld should be figured by looking at the wages in the prior years, including the back pay.

[peggysioux]

Awarded Backpay

Roland, thank you for the descriptive explanation of the reporting of the wages; it helped me to understand the process.

Peggy Sioux

[FEDUKE404]

Dealing with FICA wage increases

I've never run into a scenario like this. Let me see if I am close to understanding the points made:

Prior years - A corrected W2 will be issued, with the "new" FICA (and Medicare?) wages being shown. The actual "taxable income" will remain the same as originally reported.

Current year: The W2 will show some seriously larger "taxable income" due to the retroactive payments. The FICA/Medicare wages will only reflect the current year amount.

I don't really see any tax impact (of the amended returns type) for the prior years, with the possible exception if the wage-earner now exceeds the FICA base for the year(s) involved due to multiple employers.

As for the current year, depending upon the amount of retroactive pay received, the client could find himself in a real briar patch when considering higher tax brackets, taxable amounts of any Soc Sec benefits, allowable medical deductions, and similar stuff.

Someone can let me know if my logic is reasonable or I'm somewhere out in left field. . .

FE

[peggysioux]

Awarded Back Pay

Ok, I am once again confused.......the taxpayer received copies of the W-2c's and the city (large city in CA) that employees him adjusted his income box 1 of the W-2c's. Taxpayer does not pay into Social Security or Medicare so no adjustment in box 3 or 5. The taxpayer is a police officer who had a case brought against him and the outcome was in his favor so he received his back pay. Is there certain circumstances where there are exceptions?? I would think a large city would know how to properly handle. Taxpayer said that other officers who were in similar circumstances filed amended tax returns after receiving the W-2c's.

Would appreciate some input.

Peggy Sioux

[FEDUKE404]

Anything is possible in the People's Republic of California

Sounds illogical on the surface for funds PAID in current year but somehow allocated to a prior tax year(s).

( Did they pay any interest?? )

Nice move on having no FICA/Medicare issues.

Side question: So, if the wages were for several years back, let's say 2010, client would then receive a W-2C for calendar year 2010 but would owe no taxes since the filing/extension deadline for 2010 is already passed?

FE

[peggysioux]

Awarded Back Pay

Sounds illogical on the surface for funds PAID in current year but somehow allocated to a prior tax year(s).

( Did they pay any interest?? )

Nice move on having no FICA/Medicare issues.

Side question: So, if the wages were for several years back, let's say 2010, client would then receive a W-2C for calendar year 2010 but would owe no taxes since the filing/extension deadline for 2010 is already passed?

FE

Very illogical. Yes, interest was also paid which will be income for 2016.

Peggy Sioux

[Snaggletooth]

Self - Employment

I am gathering from previous discussions that "back pay" separates the relevant tax liability as follows:

1) For Social Security/Medicare - taxable in the year(s) associated with the back pay.
2) For Income Tax - taxable in the year received.

Not wishing to complicate with possible exceptions, I would like to ask the following question if a self-employed award is received applicable to multiple years:

1) For Self-Employment tax - taxable in the year(s) associated with the award.
2) For Income Tax - taxable in the year received.

Would this be true for a self-employed person? (Assume the proprietor is NOT an accrual-based taxpayer)

[FEDUKE404]

Back-pay for self-employed

I am gathering from previous discussions that "back pay" separates the relevant tax liability as follows:

1) For Social Security/Medicare - taxable in the year(s) associated with the back pay.
2) For Income Tax - taxable in the year received.

Not wishing to complicate with possible exceptions, I would like to ask the following question if a self-employed award is received applicable to multiple years:

1) For Self-Employment tax - taxable in the year(s) associated with the award.
2) For Income Tax - taxable in the year received.

Would this be true for a self-employed person? (Assume the proprietor is NOT an accrual-based taxpayer)

One would think it would be rather difficult for a self-employed (cash basis) person to be eligible for "back pay" ?

Who knows. After reading this thread, I'm firmly convinced I am thoroughly confused !!

FE

[peggysioux]

Awarded Back Pay

One would think it would be rather difficult for a self-employed (cash basis) person to be eligible for "back pay" ?

Who knows. After reading this thread, I'm firmly convinced I am thoroughly confused !!

FE

Yes, I am thoroughly confused as well but want to make sure I am handling correctly for the taxpayer. It logically makes sense that all income would be taxable in the year received; just not sure why city would report as they are and want to make sure there are no exceptions regarding the reporting of income that I am not aware of.

Peggy Sioux