IRS releases new FAQs on Form W-2c

The IRS has released a new round of FAQs in two fact sheets, both of which clarify the circumstances under which you must provide employees with Forms W-2c if you took the payroll credits for providing them with pandemic-related paid sick or family leave during 2020 and/or 2021.

Unlike other fact sheets the IRS has issued recently, you can’t rely on these FAQs should the IRS later question you about the paid leave you furnished or tax credits you’ve taken. If you reasonably and in good faith rely on these FAQs, you may be able to claim reasonable-cause relief from negligence or accuracy-related penalties if you underpaid your payroll taxes.

Fact sheet 2022-15

The FAQs in Fact Sheet 2022-15 cover tax credits for paid leave under the American Rescue Plan for leave taken after March 31, 2021, and before Sept. 30, 2021. Just as a reminder, pandemic-related paid leave extended to employees last year was voluntary on your part. If you extended paid leave to employees and took payroll tax credits for doing so, you were required to report the leave to employees in Box 14 of their 2021 W-2s.

The new FAQ 98a reads like this.

Is an eligible employer that claims the tax credits for qualified leave wages paid after Dec. 31, 2021, for leave taken by an employee in 2021, required to furnish the employee Form W-2c to correct the amount of sick leave and family leave wages reported in Box 14 of the employee’s 2021 Form W-2?

Short answer: The easy part of the answer is Yes. We can certainly see an employer paying wages after Dec. 31, 2021, for leave taken before Sept. 30, 2021. The rest of the answer isn’t as straightforward as we would like. IRS: On this W-2c you will be correcting the employee’s 2021 W-2 by reporting the corrected amounts of sick leave and family leave wages to include the qualified leave wages paid after Dec. 31, 2021 (its words, not ours).

You don’t have to file these W-2c forms with the Social Security Administration.

What’s troubling us: If the IRS hasn’t made a mistake—it’s had a few days to correct any mistakes and it hasn’t—you will be reporting wages paid in 2022 on a 2021 Form W-2c. This isn’t how things normally work. Normally, you would report wages paid in 2022 on a 2022 W-2. This leaves us with two open questions:

• How does your payroll system deal with this—are employees over-or under-withheld this year because of this adjustment? We don’t have the answer.
• Likewise, what’s reported on the 2022 W-2? We don’t have the answer to that question, either.

We’re keeping our ears and eyes open for any further clarifications of this reporting requirement.

It’s also not a piece of cake for employees who have an independent entitlement to take a paid leave credit on their 1040s because they have side gigs. The answer to FAQ 116a requires employees to recalculate the credit on their 2021 Form 7202. If the amount of the qualified leave credit changes from the amount claimed on their 2021 1040s, they’ll have to file Form 1040-X.

Fact Sheet 2022-16

FAQs in Fact Sheet 2022-16 cover tax credits for paid leave provided prior to April 1, 2021. This includes two separate circumstances—paid leave was mandatory through Dec. 31, 2020. If employees had any leave remaining, you could choose to continue the paid leave through the end of the first quarter of 2021. If you continued providing leave, you were eligible for a payroll tax credit.

FAQ 54g reads like this:

Is an eligible employer that claims the tax credits for qualified leave wages paid after Dec. 31, 2021, for leave taken by an employee in 2020 or 2021, required to furnish Form W-2c to correct the amount of sick leave and family leave wages reported in Box 14 of the employee’s 2020 and/or 2021 Form W-2?

Again, the short answer is Yes, with the same troubling phrase. IRS: If an eligible employer reports sick leave or family leave wages paid after Dec. 31, 2021, for leave taken by an employee after March 31, 2020, and before April 1, 2021, and claims a tax credit, the eligible employer must furnish the employee Form W-2c to report the corrected amounts of sick leave and family leave wages to include the qualified leave wages paid after Dec. 31, 2021 in Box 14.

This raises yet another question: If you filed W-2c forms in 2021 to correct the reporting of paid leave in 2020, must you now file another W-2c to correct the correction?

You don’t have to file these W-2c forms with the Social Security Administration.

Employees with side gigs are also left in the same position—they must recalculate their credits and file Form 1040-X for 2020, 2021 or both.