Special Reporting Situations for Form W-2

Adoption benefits.   Amounts paid or expenses incurred by an employer for qualified adoption expenses under an adoption assistance program are not subject to income tax withholding and are not reportable in box 1. However, these amounts (including adoption benefits paid from a section 125 (cafeteria) plan, but not including adoption benefits forfeited from a cafeteria plan) are subject to social security, Medicare, and railroad retirement taxes and must be reported in boxes 3 and 5. Also, the total amount must be reported in box 12 with code T.

See Notice 97-9, 1997-1 C.B. 365, for more information on adoption benefits. Advise your employees to get Pub. 968, Tax Benefits for Adoption.

Agent reporting.   Generally, an agent that has an approved Form 2678, Employer Appointment of Agent, should enter his or her name as the employer in box c of Form W-2, and file one Form W-2. However, if the agent (a) is acting as an agent for two or more employers or is an employer and is acting as an agent for another employer and (b) pays social security wages for more than one employer in excess of the wage base to an individual, special reporting for payments to that individual is needed.

If (a) and (b) above apply, the agent must file separate Forms W-2 reflecting the wages paid by each employer. On each Form W-2, the agent should enter the following in box c of Form W-2:

• (Name of agent)
• Agent for (name of employer)
• Address of agent.

Each Form W-2 should reflect the EIN of the agent in box b. In addition, the employer's EIN should be shown in box h of Form W-3. See Rev. Proc. 70-6, 1970-1 C.B. 420, for procedures to be followed in applying to be an agent.

Generally, an agent is not responsible for refunding excess social security or railroad retirement (RRTA) tax on employees. If an employee worked for more than one employer during 2002 and had more than $5,263.80 in social security and Tier 1 RRTA tax withheld (or more than $3,087.00 in Tier 2 RRTA tax withheld), he or she should claim the excess on the appropriate line of Form 1040 or 1040A.

Archer MSA.   An employer's contribution to an employee's Archer MSA is not subject to income tax withholding, or social security, Medicare, or railroad retirement taxes, if it is reasonable to believe at the time of the payment that the contribution will be excludable from the employee's income. However, if it is not reasonable to believe at the time of payment that the contribution will be excludable from the employee's income, employer contributions are subject to income tax withholding and social security and Medicare taxes (or railroad retirement taxes, if applicable) and must be reported in boxes 1, 3, and 5.

You must report all employer contributions to an Archer MSA in box 12 of Form W-2 with code R. Employer contributions to an Archer MSA that are not excludable from the income of the employee also must be reported in box 1.

An employee's contributions to an Archer MSA are includible in income as wages and are subject to income tax withholding and social security and Medicare taxes (or railroad retirement taxes, if applicable). Employee contributions are deductible, within limits, on the employee's Form 1040.

See Notice 96-53, 1996-2 C.B. 219 and Pub. 969, Medical Savings Accounts (MSAs) for more information.

Clergy and religious workers.   For certain members of the clergy and religious workers who are not subject to social security and Medicare taxes as employees, boxes 3 and 5 of Form W-2 should be left blank. You may include a minister's parsonage and/or utilities allowance in box 14. For information on the rules that apply to ministers and certain other religious workers, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and section 4, Religious Exemptions, of Pub. 15-A.

Corrections. Use the December 2001 revision of Form W-2c, Corrected Wage and Tax Statement, to correct errors (such as incorrect name, SSN, or amount) on a previously filed Form W-2.

If your employee is given a new social security card following an adjustment to his or her resident status that shows a different name or SSN, file a Form W-2c for the most current year only.

File Form W-3c, Transmittal of Corrected Wage and Tax Statements, whenever you file a Form W-2c with the SSA, even if you are only filing a Form W-2c to correct an employee's name or SSN. However, see Incorrect address on employee's Form W-2 below, for information on correcting an employee's address. Use Form W-3c to correct a previously filed Form W-3.

If you discover an error on Form W-2 after you issue it to your employee but before you send it to the SSA, check the Void box at the top of the form on Copy A. Prepare a new Copy A with the correct information, and send it to the SSA. Write Corrected on the employee's new copies (B, C, and 2), and furnish them to the employee. (If the Void Form W-2 is on a page with a correct Form W-2, send the entire page to the SSA. The Void form will not be processed.)

If you are making an adjustment in 2002 to correct social security and Medicare taxes for a prior year, you must file Form 941c, Supporting Statement To Correct Information, with your Form 941 or Form 943 in the return period you find the error, and issue the employee a Form W-2c for the prior year. If you are correcting social security or Medicare wages or tips, also file the entire Copy A page of Form W-2c with Form W-3c with the SSA to correct the social security records.

Incorrect address on employee's Form W-2.   If you filed a Form W-2 showing an incorrect address for the employee but all other information on Form W-2 is correct, do not file Form W-2c with the SSA merely to correct the address.

However, if the address was incorrect on the Form W-2 furnished to the employee, you must do one of the following:

• Issue a new, corrected Form W-2 to the employee, including the new address. Indicate REISSUED STATEMENT on the new copies. Do not send Copy A to the SSA.
• Issue a Form W-2c to the employee showing the correct address in box b and all other correct information. Do not send Copy A to the SSA.
• Mail the Form W-2 with the incorrect address to the employee in an envelope showing the correct address or otherwise deliver it to the employee.

Deceased employee's wages.   If an employee dies during the year, you must report the accrued wages, vacation pay, and other compensation paid after the date of death.

If you made the payment in the same year the employee died, you must withhold social security and Medicare taxes on the payment and report the payment on the employee's Form W-2 only as social security and Medicare wages to ensure proper social security and Medicare credit is received.

On the employee's Form W-2, show the payment as social security wages (box 3) and Medicare wages and tips (box 5) and the social security and Medicare taxes withheld in boxes 4 and 6. Do not show the payment in box 1.

If you made the payment after the year of death, do not report it on Form W-2, and do not withhold social security and Medicare taxes.

Whether the payment is made in the year of death or after the year of death, you also must report it in box 3 of Form 1099-MISC, Miscellaneous Income, for the payment to the estate or beneficiary. Use the name and taxpayer identification number (TIN) of the payment recipient on Form 1099-MISC.

Example.   Before Employee A's death on June 15, 2002, A was employed by Employer X and received $10,000 in wages on which Federal income tax of $1,500 was withheld. When A died, X owed A $2,000 in wages and $1,000 in accrued vacation pay. The total of $3,000 (less the social security and Medicare taxes withheld) was paid to A's estate on July 20, 2002. Because X made the payment during the year of death, X must withhold social security and Medicare taxes on the $3,000 payment and must complete Form W-2 as follows:

• Box d - Employee A's SSN
• Box e - Employee A's name
• Box f - Employee A's address
• Box 1 - 10000.00 (does not include the $3,000 accrued wages and vacation pay)
• Box 2 - 1500.00
• Box 3 - 13000.00 (includes the $3,000 accrued wages and vacation pay)
• Box 4 - 806.00 (6.2% of the amount in box 3)
• Box 5 - 13000.00 (includes the $3,000 accrued wages and vacation pay)
• Box 6 - 188.50 (1.45% of the amount in box 5)

Employer X also must complete Form 1099-MISC as follows:

• Boxes for: Recipient's name, address, and TIN - The estate's name, address, and TIN
• Box 3 - 3000.00 (Even though amounts were withheld for social security and Medicare taxes, the gross amount is reported here.)

If Employer X made the payment after the year of death, the $3,000 would not be subject to social security and Medicare taxes and would not be shown on Form W-2. However, the employer would still file Form 1099-MISC.

Educational assistance programs.   The revised $5,250 exclusion for employer-provided educational assistance applies to courses starting after December 31, 2001. Generally, a course starts on the first regular day of class. See Pub. 508, Tax Benefits for Work-Related Education, and section 2 of Pub. 15-B for more information. Also see the instructions for box 1 on page 7.

Election workers.   Report on Form W-2 payments of $600 or more to election workers for services performed in state, county, and municipal elections. File Form W-2 for payments of less than $600 paid to election workers if social security and Medicare taxes were withheld under a section 218 (Social Security Act) agreement. Do not report election worker payments on Form 1099-MISC.

Employee business expense reimbursements.   Reimbursements to employees for business expenses must be reported as follows:

• Generally, payments made under an accountable plan are excluded from the employee's gross income and are not reported on Form W-2. However, if you pay a per diem or mileage allowance and the amount paid exceeds the amount treated as substantiated under IRS rules, you must report as wages on Form W-2 the amount in excess of the amount treated as substantiated. The excess amount is subject to income tax withholding and social security and Medicare taxes. Report the amount treated as substantiated (i.e., the nontaxable portion) in box 12 using code L. (See page 9.)
• Payments made under a nonaccountable plan are reported as wages on Form W-2 and are subject to income tax withholding and social security and Medicare taxes.

For more information on accountable plans, nonaccountable plans, amounts treated as substantiated under a per diem or mileage allowance, the standard mileage rate, the per diem substantiation method, and the high-low substantiation method, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses; Pub. 1542, Per Diem Rates; and section 5 of Circular E.

Employee's taxes paid by employer.   If you paid your employee's share of social security and Medicare taxes rather than deducting them from the employee's wages, you must include these payments as wages subject to income tax withholding and social security, Medicare, and Federal unemployment (FUTA) taxes. Generally, this increase in your employee's wages for your payment of the employee's social security and Medicare taxes is also subject to employee social security and Medicare taxes. The amount to include as wages is determined by using the formula contained in the discussion of Employee's Portion of Taxes Paid by Employer in section 7 of Pub. 15-A.

This does not apply to household and agricultural employers. If you pay a household or agricultural employee's social security and Medicare taxes, you must include these payments in the employee's wages. However, the wage increase due to the tax payments is not subject to social security, Medicare, or FUTA taxes.

Fringe benefits.   Include all taxable fringe benefits in box 1 of Form W-2 as wages, tips, and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Although not required, you may include the total value of fringe benefits in box 14 (or on a separate statement). However, if you provided your employee a vehicle and included 100% of its annual lease value in the employee's income, you must separately report this value to the employee in box 14 (or on a separate statement). The employee can then figure the value of any business use of the vehicle and report it on Form 2106, Employee Business Expenses. See Pub. 15-B, Employer's Guide to Fringe Benefits.

If you used the commuting rule or the vehicle cents-per-mile rule to value the personal use of the vehicle, you cannot include 100% of the value of the use of the vehicle in the employee's income. See Pub. 15-B.

Golden parachute payments.   Include these payments in boxes 1, 3, and 5 of Form W-2. Withhold income, social security, and Medicare taxes as usual and report them in boxes 2, 4, and 6, respectively. Excess parachute payments are also subject to a 20% excise tax. If the excess payments are considered wages, withhold the 20% excise tax and include it in box 2 as income tax withheld. Also report it in box 12 with code K. For additional information, see sections 280G and 4999.

Government employers.   Federal, state, and local agencies have two options for reporting their employees' wages that are subject only to Medicare tax for part of the year and full social security and Medicare taxes for part of the year.

Option one (which the SSA prefers) is to file a single Form W-2 with the Medicare-only wages and the social security and Medicare wages combined. The Form W-3 must have the 941 box checked in box b.

Option two is to file two Forms W-2 and two Forms W-3. File one Form W-2 for wages subject to Medicare tax only. Be sure to check the Medicare govt. emp. box in box b of Form W-3. File the second Form W-2 for wages subject to both social security and Medicare taxes with the 941 box checked in box b of Form W-3.

Group-term life insurance.   If you paid for group-term life insurance over $50,000 for an employee or a former employee, you must report the cost of excess coverage determined by using the table in section 5 of Pub.15-A in boxes 1, 3, and 5 of Form W-2. Also, show the amount in box 12 with code C. For employees, you must withhold social security and Medicare taxes, but not income tax. Former employees must pay the employee part of social security and Medicare taxes on premiums for group-term life insurance over $50,000 on Form 1040. You are not required to collect those taxes. However, you must report the uncollected social security tax with code M and the uncollected Medicare tax with code N in box 12 of Form W-2.

Lost Form W-2 - reissued statement.   If an employee loses a Form W-2, write REISSUED STATEMENT on the new copy and furnish it to the employee. Do not send Copy A of the reissued Form W-2 to the SSA. Employers are not prohibited (by the Internal Revenue Code) from charging a fee for the issuance of a duplicate Form W-2.

Moving expenses.   Report moving expenses as follows:

• Qualified moving expenses an employer pays to a third party on behalf of the employee (e.g., to a moving company) and services that an employer furnishes in kind to an employee are not reported on Form W-2.
• Qualified moving expense reimbursements paid directly to an employee by an employer are reported only in box 12 of Form W-2 with code P.
• Nonqualified moving expense reimbursements are reported in boxes 1, 3, and 5 of Form W-2. These amounts are subject to income tax withholding and social security and Medicare taxes.

Railroad employers.   Railroad employers must file Form W-2 to report their employees' wages and income tax withholding in boxes 1 and 2. Reporting on magnetic media may be required; see Magnetic media/electronic reporting on page 2.

If an employee is covered by social security and Medicare, also complete boxes 3, 4, 5, 6, and 7 of Form W-2 to show the social security and Medicare wages and the amounts withheld for social security and Medicare taxes. On the Form W-3 used to transmit these Forms W-2, check the 941 box in box b.

For employees covered by RRTA tax, you also must report the Tier 1 and Tier 2 taxes withheld in box 14 of Form W-2. Label them Tier 1 tax and Tier 2 tax. Boxes 3, 4, 5, 6, and 7 apply only to covered social security and Medicare employees and are not to be used to report railroad retirement wages and taxes. On the Form W-3 used to transmit these Forms W-2, check the CT-1 box in box b.

Repayments.   If an employee repays you for wages received in error, do not offset the repayments against current year's wages unless the repayments are for amounts received in error in the current year. Repayments made in the current year, but related to a prior year or years, require special tax treatment by employees, in some cases. You may advise the employee of the total repayments made during the current year and the amount (if any) related to prior years. This information will help the employee account for such repayments on his or her Federal income tax return.

If the repayment was for a prior year, you must file Form W-2c with the SSA to correct only social security and Medicare wages and taxes. Do not correct Wages in box 1 on Form W-2c for the amount paid in error. See section 13 of Circular E (or section 9 of Circular A, Agricultural Employers Tax Guide (Pub. 51)), for information on reporting adjustments to Form 941 (or 943).

Tell your employee that the wages paid in error in a prior year remain taxable to the employee for that year. This is because the employee received and had use of those funds during that year. The employee is not entitled to file an amended return (Form 1040X) to recover the income tax on these wages. Instead, the employee is entitled to a deduction (or a credit, in some cases) for the repaid wages on his or her Form 1040 for the year of repayment.

Scholarship and fellowship grants.   Give a Form W-2 to each recipient of a scholarship or fellowship grant only if you are reporting amounts includible in income under section 117(c) (relating to payments for teaching, research, or other services required as a condition for receiving the qualified scholarship). (See also Pub. 15-A and Pub. 520, Scholarships and Fellowships.) Such amounts are subject to income tax withholding. However, their taxability for social security and Medicare taxes depends on the nature of the employment and the status of the organization. See Students in section 15 of Circular E.

Sick pay.   If you had employees who received sick pay in 2002 from an insurance company or other third-party payer and the third party notified you of the amount of sick pay involved, you may be required to report the information on the employees' Forms W-2. If the insurance company or other third-party payer did not notify you in a timely manner about the sick pay payments, it must prepare Forms W-2 and W-3 for your employees showing the sick pay. See Sick Pay Reporting in section 6 of Pub. 15-A for specific reporting instructions.

SIMPLE retirement account.   An employee's salary reduction contributions to a SIMPLE (savings incentive match plan for employees) retirement account are not subject to income tax withholding but are subject to social security, Medicare, and railroad retirement taxes. Do not include an employee's contribution in box 1; but do include it in boxes 3 and 5. An employee's total contribution also must be included in box 12 with code D or S.

An employer's matching or nonelective contribution to an employee's SIMPLE is not subject to income tax withholding or social security, Medicare, or railroad retirement taxes and is not to be shown on Form W-2.

See Notice 98-4, 1998-1 C.B. 269, for more information on SIMPLE retirement accounts.

Successor/predecessor employers.   If you buy or sell a business during the year, see Rev. Proc. 96-60, 1996-2 C.B. 399, for information on who must file Forms W-2 and employment tax returns.

Terminating a business.   If you terminate your business, you must provide Forms W-2 to your employees for the calendar year of termination by the due date of your final Form 941. You must also file Forms W-2 with the SSA by the last day of the month that follows the due date of your final Form 941. However, if any of your employees are immediately employed by a successor employer, see Rev. Proc. 96-60. Also, see Rev. Proc. 96-57, 1996-2 C.B. 389, for information on automatic extensions for furnishing Forms W-2 to employees and filing Forms W-2.

USERRA makeup amounts to a pension plan.   If an employee returned to your employment after military service and certain makeup amounts were contributed to a pension plan for a prior year(s) under the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), report the prior year contributions separately in box 12. See the TIP above Code D on page 9. You also may report certain makeup amounts in box 14. See the box 14 instructions on page 10.

Instead of reporting in box 12 (or box 14), you may choose to provide a separate statement to your employee showing USERRA makeup contributions. The statement must identify the type of plan, the year(s) to which the contributions relate, and the amount contributed for each year.

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