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April 1, 2021 | HR Compliance | Posted by Vicki Lambert, CPP

Important W-2 Updates in Relation to COVID-19 Sick Leave Wages

This past pandemic year was an especially difficult year for payroll departments. Between the shut down for COVID-19, the corresponding legislation affecting the taxation of wages and the providing of paid sick and family leave for the first time on a national level, many payroll departments were left scratching their heads. What was most difficult was trying to determine how it all ties together in reporting on the Form W-2 at year-end. This original legislation, The Family’s First Coronavirus Response Act (FFCRA), was set to expire on December 31, 2020, but was continued under The Tax Relief Act Of 2020. This meant that not only payroll departments must deal with the paid sick leave and paid family leave into 2021, but they also must handle the fallout of an expired Presidential Memorandum that is still affecting the taxation of wages paid in 2020 in 2021.

As a review, let us quickly recap the legislation and presidential memorandums that were issued in 2020 before discussing the proper way of reporting and/or correcting the reporting on Form W-2:

  • The FFCRA mandated that certain employers must offer paid sick leave and paid family leave to their employees. This leave was to be used if the employee or the employee’s family was affected by COVID-19.  
  • The paid sick leave was authorized in two separate sections of the FFCRA. The paid sick leave that affected the employee’s own health was contained in the Emergency Paid Sick Leave Act or EPSLA, Section 5102 (a) paragraphs (1), (2), and (3).  
  • The wages that affected the employee taking sick leave to care for family members was contained in the same section but in paragraphs (4), (5), and (6). The paid family leave was authorized under section 3102 (b) of the Emergency Family and Medical Leave Expansion Act or EFMLEA.  
  • The presidential memorandum, issued on August 8, 2020, authorized the employer to delay the requirement to withhold Social Security taxes from the employee’s wages for the period of September 1, 2020 through December 31, 2020.  
  • This deferral was authorized with the understanding that the employer would collect this tax from the employee during the 2021 calendar year. The original completion date for the collection of this tax was April 30, 2021. This final collection date, however, was extended to December 31, 2021 by the IRS notice 2021 – 11. 

One of the first areas of concern that a payroll department may have encountered was in the area of reconciliations. Employers are required to reconcile the 941 form to the W-2s before submitting the Form 941 to the IRS. However, if the employer utilized any of the COVID-19 tax relief, this made reconciliation more difficult. Since the paid sick leave and the paid family leave were not subject to the employer’s share of Social Security, this means that they had to be put on a separate line of the Form 941 but still would have been included in the box 3 (Social Security wages) of the W-2. If the employer deferred any of the employee’s share of the Social Security tax, the wages would have been reported on Form 941 and included in the tax calculations. However, the wages would not be reported on the original Form W-2.

The main concern that payroll departments had in 2020 and may have in 2021 is the correct reporting on Form W-2. It is a common concern whether the Form W-2c will need to be filed for 2020 if the employer deferred any of the employee’s Social Security taxes.

First, let us examine the reporting of the paid sick leave and paid family leave on the Form W-2. We will be looking at what the IRS advised us to do for the tax year 2020. However, since the same rules will be in effect for 2021, at least for the first quarter, these will most likely apply to the 2021 Form W-2. The qualified wages under the FFCRA are included in boxes 1 (wages, tips, other compensation), 3 (Social Security wages) and 5 (Medicare wages and tips). In addition to this reporting, the IRS requires that the qualified sick leave wages and the qualified family leave wages also be reported in box 14 (Other) of the Form W-2. If this is not possible, the employer could send a separate statement to the employee detailing these paid wages. The purpose of this statement is to provide employees who are also self-employed with the amounts they may need to figure their qualified sick leave equivalent or qualified family leave equivalent credits.

The employer must send a separate statement for each type of the wages paid. Sick leave wages paid for paragraphs (1), (2), and (3) of the EPSLA must be reported separately from the wages paid under paragraphs (4), (5), and (6). For paragraphs (1), (2), and (3) the wages should be labeled “sick leave wages subject to the $511 per day limit”. For paragraphs (4), (5), and (6) the wages should be labeled “sick leave wages subject to the $200 per day limit”. The family leave wages are also reported separately in box 14 or on a separate statement. The total amount of the wages paid under the EFMLEA must be reported in box 14 using the explanation “emergency family leave wages”. If a separate statement is issued instead of listing these items in box 14 of the W-2 form, the statement must be provided at the same time in the same manner as the Form W-2 itself.

What about the reporting of the deferral of the employee’s Social Security tax in 2020 and the repayment of the tax in 2021?

Form W-2 for 2020: If the employer deferred the employee portion of the Social Security tax when the wages were reported on the Form W-2, those wages should have been included in box 3 and/or box 7 if appropriate. However, the employer did not include in box 4 (Social Security tax withheld) any amount of the deferred Social Security tax that had not been withheld. In 2021, the employer is now required to collect the deferred tax.

How should this be handled on the Form W-2?

Form W-2c for 2020: The employee’s Social Security tax deferred in 2020 that is withheld in 2021 is not reported on the 2020 Form W-2. Instead, it needs to be reported in box 4 on a Form W-2c issued for 2020. On the Form W-2c, the employer should enter the tax year 2020 in box c and adjust the amount previously reported in box 4 of the 2020 Form W-2 to include the deferred amounts that are collected in 2021. The Form W-2c should be filed with the Social Security Administration as soon as possible after the employer has finished collecting or withholding the entire deferred amounts in 2021.

Will a Form W-2c be necessary?

If the corrected amount in box 4 of the Form W-2c for 2020 causes the total amount of the employee’s Social Security tax withheld to exceed the maximum withholding permitted for 2020 of $8,537.40 the employee will need to handle claiming the credit personally. The employee should file a 1040 X to claim any additional Social Security that may have been withheld over the permitted limit. This may happen when the employee had two or more employers who both deferred the tax. It is not up to the employer to determine if the employee had two or more employers.

How the COVID-19 legislation will play out in 2021 is still up in the air. We have had one major stimulus package which extended many of the credits, and payroll is still recouping deferred Social Security taxes for 2020. But the guidance that the IRS has given us for 2020 appears to apply to 2021 as well. So, for the time being, payroll departments will need to rely on the 2020 guidance as we reconcile and balance our W-2s and 941s for 2021.

The information contained herein is general in nature and is meant to inform the reader of changing rules or regulations but is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ascentis, The Payroll Advisor™ or Vicki M. Lambert, CPP.

Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website www.thepayrolladvisor.com offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.