What Is Back Pay?

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 wages.

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.

Example. 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.

Example. 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 Medicare.

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 paid.

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 Metro West 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 reports.

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.

Example. 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 necessary.

Graphic

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 information:

1. The employer's name, address, and employer identification number (EIN).
2. 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).)
3. 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.)
4. A list of employees receiving the payment and the following information for each employee:
1. The tax year you paid and reported the back pay.
2. The employee's social security number (SSN).
3. The employee's name (as shown on his or her social security card).
4. The amount of the back pay award excluding any amounts specifically designated otherwise, e.g. damages for personal injury, interest, penalties, and legal fees.
5. The period(s) the back pay award covers (beginning and ending dates--month and year).
6. 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.)
7. 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.)

*Note: 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).

Questions

If you have questions concerning back pay under a statute, contact your local social security office.

Exception: 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 information:

1. The name and address of the employer,
2. The statute under which you paid the back pay,
3. The name and telephone number of the employer contact, and
4. 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 Payment."

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