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Retro Pay for Previous Year

Please help me understand what we do in this situation. I was under one impression, but then online there are other guidelines. Scenario is: Client just realized that EE didn't get update with a raise of $.50 per hour a year ago (May 2017). The EE is owed $550 at this point, for the # of hours worked since May 2017 thru now. The client wants to report the gross $550 now, in a 5/25/18 payroll. I was mentioning that some of the hours worked were in 2017, and thought that the gross that pertained to each quarter (2Q17, 3Q17, 4Q17, 1Q18) needed to be broken out and reported in the correct Qtr/ Year and amend the quarterlies and W2. Client found online that Retro Pay could be reported now and that no updates were needed for the prior year. This confused me, since the wages were Earned in 2017 also and taxes should have been reported back then, for those hours. Why would it be ok for the client to report this in a current payroll? Why would the IRS not care about getting their money back then? Wouldn't this allow clients to choose when they wanted to pay something out, if they couldn't afford it before? Thanks

Comments

  • CaroleNJCaroleNJ ✭✭

    Since the employee did not have constructive receipt of the money in 2017, their would be no taxes due for 2017 or earnings adjustments needed to be made. Most quarterly adjustments are based on dollars already paid, but reported incorrectly during a tax period.

    joanna1181
  • David WarrenDavid Warren ✭✭✭✭

    Is there any statutory issues involved? Minimum wage or overtime?

  • David WarrenDavid Warren ✭✭✭✭

    "Constructive receipt" is an IRS concept. Other agencies such as DOL has unrelated rules possibly involved.

    joanna1181
  • Interesting. What would be the point of going through the hassle of amendments to previous years and quarters then, if the wages were not paid yet? It sounds like you are saying that Amendments should only be done if the wrong earning (Taxable versus Non-Taxable) are used or only if there were things like Manuals or Voids not recorded. It's weird how much I am learning since leaving my last payroll job. I was told that the IRS always wants their money in the correct quarter in which is it was due or there would be penalties.

  • I can see that companies could take advantage of this and not pay their employees timely for increases. I wonder how this impacts records for the state, when an EE's effective date for a raise was a year ago, but the old pay rate was paid the whole time. For audits, this must be bad, right?

  • David WarrenDavid Warren ✭✭✭✭

    Unless there are statutory requirements such as minimum wage and overtime (FLSA), then companies never have a requirement to pay raises, and the IRS constructive receipt rule is in place. But if the company is in violation of minimum wage or overtime rules, then constructive receipt from a different agency is sort of a "who cares". Sort of like telling a traffic cop that you did not get your last pay check is in do way a defense for a speeding ticket. IRS rules are IRS rules and DOL rules are DOL rules. Neither agency cares about the other agency's rules.

    rrupertCaroleNJ
  • thanks so much!

  • The retro pay might affect the regular rate of pay for overtime computation purposes during certain work weeks in 2017 - in that case, the overtime for those weeks would have to be recomputed and there would be additional retro pay paid in 2018.

    The other issue is whether this is a statutory back pay award or special wage payment for FICA purposes. Statutory back pay awards should be allocated back to the years when the pay should have been paid. This is not done with a W-2c or a 941-X, it is done with a special report sent to the SSA to request that the SSA allocate the back pay to the appropriate periods. Non-statutory back pay awards are not allocated back to prior years.

    A special wage payment is back pay paid to an employee or former employee who is drawing Social Security Benefits. In that case, the special payment may reduce the employee's Social Security benefits if not reported to the SSA.

    The handling of statutory back pay awards, non-statutory back pay awards, and special wage payments are covered in IRS Publication 957 Reporting Back Pay and Special Wage Payments to the Social Security Administration

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