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.
Back Pay Under a Statute
Back pay awarded under a statute is a payment by an employer
pursuant to 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:
- Age Discrimination in Employment Act,
- Americans with Disabilities Act,
- Equal Pay Act,
- Fair Labor Standards Act,
- National Labor Relations Act,
- State minimum wage laws, and
- State statutes that protect rights to employment and
Payments based on laws that have a similar effect to those listed
above also may qualify as payments made under a statute.
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 sanction by a court or
government agency is back pay. However, it 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.
Reporting Back Pay
Employers should use Form W-2, Wage and Tax Statement,
or magnetic media wage reports to report back pay as wages in
the year they actually pay the employee.
In 1997, 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 1992 through December 1996.
Her employer properly reflected social security wages of $65,400 and
Medicare wages of $150,000 on her 1997 Form W-2.
However, if an employer did not include back pay wages on a
previously filed Form W-2 or magnetic media wage report, the
employer should prepare a wage correction report, Form W-2c,
Corrected Wage and Tax Statement or magnetic media, to add
the back pay award to the wages previously reported.
If, in the above example, Terry Morris' employer had prepared her
1997 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 1997 Form W-2 would show
previously reported social security and Medicare wages of $50,000 and
the correct amount of $65,400 for social security and $150,000 for
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.
If a back pay award is not made under a statute, the SSA credits
back pay as wages when paid. However, the SSA (if advised) credits
back pay awarded under a statute to the year(s) it should have been
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)
wages should or would 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.
The law does not require that employers notify the SSA of the
different period(s) involved in a back pay under statute case. 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
Office of Central Records Operations
Attn: Back Pay (DCC) Analyst Staff
300 North Greene Street
Baltimore, Maryland 21202
Be sure to send this special report
to the above address because the SSA handles it separately from other
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.
In 1997, Judy Wilson received a salary of $30,000 and a back pay
under statute award of $2,000 for the period January through June
1997. Her employer properly reported wages of $32,000 for social
security and Medicare on her 1997 Form W-2. No further action is
Information the SSA needs to properly credit back pay under a
statute (special report).
You should send the special report to the SSA when or after
you submit the Form W-2 (or magnetic media) 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 SSA needs the following
- The employer's name, address, and employer identification
- A signed statement citing the federal or state statute under
which the payment was made. (If the statute is not
identified, the SSA will assume the payment was not under a
statute and will not allocate to earlier period(s).)
- The name and telephone number of a person to contact. (The
SSA may have further questions concerning the back pay case or the
individual employee's information.)
- A list of employees receiving the payment and the following
information for each employee:
- The tax year you paid and reported the back pay.
- The employee's social security number (SSN).
- The employee's name (as shown on his or her social security
- The amount of the back pay award excluding any amounts
specifically designated otherwise, e.g. damages for personal injury,
interest, penalties, and legal fees.
- The period(s) the back pay award covers (beginning and
ending dates--month and year).
- The other wages paid (if none, show zero) subject to social
security and/or Medicare taxes and reported in the same year as the
back pay award.* Do not include the back pay award shown in that wage
report. (If you originally submitted the report under an establishment
number, show that number and the amount of money that is to remain
under that establishment number.)
- The amount to allocate to each reporting period.* This
includes any amount you want allocated (if applicable) to the tax year
of the award payment. (If you do not give the SSA specific amounts to
allocate, the SSA does the allocation by dividing the back pay award
by the number of months or years covered by the award.)
For periods before January 1, 1978 (before January 1, 1981, for
state and local government employers covered by a section 218
agreement), show the wage amounts by calendar quarters, i.e., quarters
ending March 31, June 30, September 30 and December 31. For all
tax years, show and identify the social security and/or Medicare
Qualified Government Employment (MQGE) wages (where applicable)
separately. (MQGE is applicable to federal employees beginning in
1983, and for certain state and local government employees beginning
in 1986.) For tax years 1991 and later, list the social security and
Medicare wages separately. If you originally reported the individual's
wages under an establishment or payroll record unit number, show the
amount of wages to remain in the award year for that number (and
furnish that number to the SSA along with the EIN).
If you have questions concerning back pay under a statute, contact
your local social security office.
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 Program Benefits Policy
Division of Coverage & Support
6401 Security Boulevard
Baltimore, MD 21235
Format for Report to the SSA
Use the format shown in Table 1 to send the SSA the information
needed to properly credit back pay under a statute.
However, in a cover letter, include the following
- The name and address of the employer,
- The statute under which you paid the back pay,
- The name and telephone number of the employer contact,
- The signature of the reporting official.
Under certain circumstances, back pay may be a special wage payment
and excluded from wages counted under the social security earnings
test. If you pay back pay to an employee age 61 or older, report it to
the SSA in accordance with this section and also follow the
instructions in the next section to report it as a "Special Wage
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