CCA 201312030: prior-year wage repayments require corrected payroll reporting

Plain-English summary

Chief Counsel advised that a corrected Form W-2c properly leaves Box 1 unchanged when an employee repays wages received in an earlier year. The social security and Medicare wage and tax boxes should be corrected for the repayment, but the prior year's income tax withholding is not changed. The repaid wages remain taxable in the year received, and the employee may claim a deduction or, in some cases, a credit in the year of repayment. The advice cited Rev. Rul. 79-311 and IRS guidance on wage repayments.

Ruling snapshot

• Question: How should an employer correct wage reporting after an employee repays prior-year wages?
• Outcome: Advice given, leave Box 1 unchanged and correct the applicable Social Security and Medicare entries.
• Key authorities: IRC § 6051; Rev. Rul. 79-311; IRS Publication 15

Full text (IRS public release)

ID: CCA-101610-12 Number: 201312030
Release Date: 3/22/2013
Office: --------------
UILC: 6051.00-00

From: ------------------
Sent: Tuesday, October 16, 2012 10:42 AM
To: --------------------------------------------
Cc: ----------------------------
Subject: RE: Revised W-2 – ITRA Voucher ---------

Thanks for your patience. I think the Form W-2c, Corrected Wage and Tax Statement, is correct and should not be changed. Box 1 should not be changed from the original W-2. Only Boxes 3 and 5 of the original W-2 should have been changed by the amount of the repayment, and boxes 4 (social security tax) and 6 (Medicare tax) of the original Form W-2 should have been changed as appropriate and this is what the Form W-2c did. The income and wages for income tax withholding purposes, including the amount of the income tax withholding which was paid under a gross-up procedure, was received and includible in gross income in -------. The repayment of $---------- in ------- does not affect gross income in --
-------. It is deductible in ------- to the extent allowable. See Rev. Rul. 79-311, 1979-2 C.B. 25.

The following is an excerpt from IRS Publication 15 on Wage Repayments:

Repayment of prior year wages. If you receive repayments for wages paid during a prior year, report an adjustment on Form 941-X or Form 944-X to recover the social security and Medicare taxes. You may not make an adjustment for income tax withholding because the wages were wages and income to the employee for the prior year. You also must file Forms W-2c and W-3c with the SSA to correct social security and Medicare wages and taxes. Do not correct wages (box 1) on Form W-2c for the amount paid in error. Give a copy of Form W-2c to the employee. Employee reporting of repayment. The wages paid in error in the 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 credit in some cases) for the repaid wages on his or her income tax return for the year of repayment.

I hope this is helpful.

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