Introduction
The Social Security Administration (SSA) has special rules for back
pay awarded by a court or government agency under a statute (a law) to
enforce a worker's protection law. The SSA also has rules for
reporting special wage payments made to employees after they retire.
These rules enable the SSA to correctly compute an employee's benefits
under the social security earnings test. These rules are for social
security coverage and benefit purposes only. This publication -
written primarily for employers - discusses what are back pay
under a statute and special wage payments. It also explains how to
report these payments to the SSA.
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.
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:
- The employer's name, address, and employer identification
number (EIN).
- 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
card).
- 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.)
*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:
- 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,
and
- 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.
Special Wage Payments
A special wage payment is an amount paid by an employer to an
employee (or former employee) for services performed in a prior year.
Special wage payments made to a retired employee receiving social
security or to an employee who continues to work while receiving
social security benefits may, if not reported to the SSA, reduce the
benefits the individual receives. Employers should report to the SSA
special wage payments made to employees and former employees who are
recipients of social security retirement benefits. Special wage
payments may include (but are not limited to):
- Accumulated sick and vacation pay,
- Back pay,
- Bonuses,
- Deferred compensation,
- Payments because of retirement,
- Sales commissions,
- Severance pay, and
- Stock options.
Note.
Payments made after retirement that are part of the normal payroll
cycle should not be routinely reported as special wage payments.
Earnings Test.
Benefits paid to a social security recipient under age 70 may be
reduced if the recipient continues to work. The SSA uses the
information in boxes 1, 3, and 5 of Form W-2 to determine the
beneficiary's current year earnings. Special wage payments, which are
for services performed in a prior year, will increase the current year
earnings on Form W-2, which in turn may result in a reduction in
the recipient's benefits. If a benefit is reduced because of a special
wage payment, the beneficiary must get documentation from the employer
before the SSA can restore the deducted portion. Therefore, employer
reports of special wage payments help prevent incorrect benefit
reductions.
Reporting Special Wage Payments
Employers must report special wage payments for income tax purposes
and social security and Medicare taxes in the year received. Report
income, social security, and/or Medicare taxes for special wage
payments on Form W-2.
See below for reporting nonqualified deferred compensation plan
deferrals and payments on Form W-2.
In addition, report to the SSA special wage payments made during
the reporting year to retired employees and employees who continue to
work while receiving social security benefits. Submit reports after
the close of the tax year. To avoid delays in processing, submit
reports in time to reach the SSA by April 1. Use one of the following
reporting methods.
Magnetic media.
Special wage payments may be reported on magnetic computer tape or
3480 cartridges. The SSA does not accept special wage payment reports
on diskettes. Use the specifications and record layout in Table 2.
Include a transmittal using the format shown in Table 3 for each tape
or cartridge submission. Mail magnetic media reports to the SSA at the
address shown in Table 3.
Tapes or cartridges not meeting the specifications in Table 2 will
be rejected. All data must be in capital letters. Year refers
to the year the payment was reported as wages on Form W-2. Do
not use punctuation (periods and/or commas) in the name field.
Do not report payments from nonqualified deferred compensation (or
section 457) plans that were reported in box 11 of Form W-2.
(Use Form SSA-131 if deferrals to and payments from nonqualified
or section 457 plans occurred during the tax year.)
Paper listing.
A paper listing can be used to report special wage payments to
several employees. Use the format in Table 4. Submit paper listings to
the local SSA office nearest your place of business.
Do not report payments from nonqualified deferred compensation (or
section 457) plans that were reported in box 11 of Form W-2.
(Use Form SSA-131 if deferrals to and payments from nonqualified
or section 457 plans occurred during the tax year.)
Form SSA-131.
Use Form SSA-131 to report special wage payments made to one
employee. Also, use this form to report nonqualified deferred
compensation and section 457 plan deferrals and payments that could
not be reported in box 11 of Form W-2. Form SSA-131 and
instructions are in Tables 5 and 6.
Form SSA-131 and instructions in Tables 5 and 6 are drafts.
The form and instructions are pending Office of Management and Budget
final approval. They should be available from the Social Security
Administration after October 1997.
Submit Form SSA-131 to the SSA office nearest your place of
business. Or, the employee can submit it to the SSA office handling
the claim. You or the employee must submit this form before the SSA
can exclude the special wage payments for purposes of the earnings
test. If reporting on more than one employee complete a separate Form
SSA-131 for each or use the paper listing format (except for
reporting nonqualified and section 457 plan deferrals and payments),
in Table 4.
Reporting Stock Options as Special Wage Payments
An option to purchase stock which is exercised in a year after the
year in which the option was earned is a special wage payment. It
should not count for the social security earnings test. Options
exercised as special wage payments by retired employees or employees
who continue to work while receiving social security benefits should
be reported by employers using the above reporting methods.
Nonqualified Deferred Compensation and Section 457 Plans
A nonqualified deferred compensation plan is a plan or arrangement
established and maintained by an employer for one or more of its
employees that provides for the deferral of compensation, but does not
meet the requirements for a tax-qualified deferred compensation plan.
For social security and Medicare purposes, deferred compensation plans
for employees of state and local governments (section 457 plans) are
treated the same as nonqualified plans. Nonqualified and section 457
plans are reported differently than other special wage payments.
Report them on Form W-2 using the following instructions.
Reporting Amounts Deferred to Nonqualified and Section 457 Plans
Nonqualified deferred compensation is subject to social security
and Medicare tax when deferred, i.e., generally, when the related
services are performed. However, if nonqualified and section 457 plans
contain provisions that delay the employee's right to receive payments
from the plan, a period of substantial risk of forfeiture exists. The
plan's deferrals, or contributions, are not subject to social security
and Medicare taxes until the period of substantial risk of forfeiture
ends.
No risk of forfeiture.
If there is no risk of forfeiture, report wage amounts deferred to
a nonqualified deferred compensation or section 457 plan in box 3 (up
to the wage base maximum) and/or box 5 of Form W-2.
Example.
Company X's nonqualified deferred compensation plan allows the
deferral of up to $20,000 of employee salaries each year. The plan has
no risk of forfeiture. Employee A defers $20,000 to the plan from a
total salary of $200,000.
Form W-2 Completion
| Box |
Amount |
| 1 |
$180,000 |
| 3* |
65,400 |
| 5 |
200,000 |
| * Wage base maximum for tax year 1997 |
|
Risk of forfeiture lapses before retirement.
If the substantial risk of forfeiture lapses before the employee
retires, report all past contributions to the plan (or the value of
the plan), including accumulated earned interest, in box 3 (up to the
wage base maximum) and/or box 5 of Form W-2. The accumulated
deferrals are reported along with any other social security and
Medicare wages earned during the year.
Report in box 11 of Form W-2 the amount of
deferrals, including any accumulated interest, that became taxable for
social security and Medicare taxes during the year (but were for prior
year services) because the deferred amounts were no longer subject to
a substantial risk of forfeiture. If the employee continues working,
future deferrals are social security and Medicare wages when they are
earned.
Do not include in box 11 deferrals that are included in boxes 3
and/or 5 and that are for current year services.
Risk of forfeiture lapses at retirement.
When an employee's right to a payment is conditioned upon working
until retirement, report all past contributions to the plan (or the
value of the plan), including accumulated earned interest, as social
security and/or Medicare wages in the year of retirement. Add the
amount to other wages paid in that year, and enter in box 3 (up to
the wage base maximum) and/or box 5 of Form W-2.
Report in box 11 of Form W-2 the amount of
deferrals, including any accumulated interest, that became taxable for
social security and Medicare taxes during the year (but were for prior
year services) because the deferred amounts were no longer subject to
a substantial risk of forfeiture.
Do not include in box 11 deferrals that are included in boxes 3
and/or 5 and that are for current year services.
Example - risk of forfeiture.
At the end of the risk-of-forfeiture period for Company Y's
nonqualified deferred compensation plan, employee B's accumulated
deferrals, plus interest earned by the plan, are $120,000, not
including B's $20,000 deferral for this year. B's wages, including
this year's deferred amount, are $80,000.
Form W-2 Completion
| Box |
Amount |
| 1 |
$60,000 |
| 3* |
65,400 |
| 5 |
200,000 |
| 11 |
120,000 |
| * Wage base maximum for tax year 1997 |
|
Reporting Payments From Nonqualified and Section 457 Plans
When an employee or former employee retires and begins receiving
payments or distributions from a nonqualified or section 457 plan,
report the payments in boxes 1 and 11 of Form W-2.
Separately identify section 457 plan distributions in box 11 by
entering code G followed by a space, and then the dollar amount.
However, if reporting a distribution from both a nonqualified plan and
section 457 plan, report it as a single amount in box 11 and do not
enter code G.
Example.
Employee D retired from the XYZ company and began receiving social
security benefits. XYZ paid D a $12,000 bonus upon retirement for
sales made in a prior year, and D received $25,000 in payments from
XYZ's nonqualified deferred compensation plan. In addition, D agreed
to continue performing services for XYZ, but on a part-time basis for
wages of $15,000 per year. D made no deferrals to the nonqualified
plan this year.
Form W-2 Completion
| Box |
Amount |
| 1 |
$52,000 |
| 3 |
27,000 |
| 5 |
27,000 |
| 11 |
25,000 |
| Report the $12,000 bonus to the SSA using Form SSA-131, magnetic media or a paper listing. See the format shown later in Tables 2 through 6, and see the discussion above under Reporting Special Wage Payments. |
|
Reporting Payments and Deferrals In the Same Year
Do not complete box 11 when payments are made from a
nonqualified plan and deferrals are reported in boxes 3
and/or 5 of Form W-2 (including current year deferrals).
Report to the SSA on Form SSA-131 the total amount the employee
earned during the tax year. Normally, the amount earned is the amount
reported in box 1 of Form W-2 less payments from a nonqualified
(section 457) plan, but including any amounts deferred under the plan
during the tax year. See Form SSA-131 and instructions in Tables
5 and 6. Form SSA-131 should be available from the SSA
after October 1997.
Example.
Employee K retired this year from Company XYZ and began receiving
social security benefits. During the year he earned wages of $50,000
and deferred $35,000 of the wages into the company's nonqualified
deferred compensation plan. K also received $75,000 in payments from
the company's nonqualified plan.
Form W-2 Completion
| Special Wage Payment |
$75,000 |
| Wages |
50,000 |
| Minus: deferral |
35,000 |
| Total reported in Box 1 |
$90,000 |
| Wages including deferral reported in Boxes 3 and 5 |
$50,000 |
| Leave Box 11 blank File Form SSA-131 |
-0- |
Form SSA-131 Completion
| Amount from box 1 of Form W-2 |
$90,000 |
| Minus: payments from a nonqualified plan |
75,000 |
| Plus: amounts deferred into the plan during the year |
35,000 |
| Total wages earned for purposes of Form SSA-131 (item 6) |
$50,000 |
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