“Back-pay” is pay received for actual or deemed employment in a prior tax year. Back-pay that is wages for covered employment is FICA taxable regardless of the year paid. Use the SS wage ceiling and percentage in effect in the year that the back-pay is distributed (not the year when the employee should have received it).
FICA-exempt payments include damages for personal injuries, interest, penalties, or legal fees. Because the SSA might treat back-pay given for different reasons in different ways (e.g., a court award for back-pay due to discrimination v. an out-of-court settlement), reporting different kinds of back-pay separately is important. Back-pay should be reported on the employee’s W-2 in the year paid.
“Special wages” are nonpayroll wages for services performed in a prior year—e.g., accumulated sick or vacation pay, bonuses, deferred compensation, sales commissions, and severance pay. If the employee or former employee now receives Social Security retirement benefits, these payments should be reported on the employee’s W-2 in the year they are received. Use Form SSA-131 to report special wage payments, such as nonqualified deferred compensation and §457 plan deferrals and payments earned in a year prior to the year of payment.
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Outsourcing payroll tax services still seem to be an alternative meant for big companies but little do they know that even small as well as midsized companies can advantage a lot from outsourcing their accounting and payroll related processes.
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