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 |
Table 2. Specifications for Magnetic Media Reporting of Special Wage Payments
Table 3. Sample Trasnmittal Form for Submission of Special Wage Payment Data
Table 4. Sample Format - Paper Listing
Table 5. Form SSA-131
Table 6. Instruction for Form-131
Previous | First
Publication Index | 2001 Tax Help Archives | Tax Help Archives | Home
