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are subject to income tax withholding and social security

are reporting amounts includible in income under section

and Medicare taxes.

117(c) (relating to payments for teaching, research, or other

services required as a condition for receiving the qualified

Nonqualified deferred compensation plans. Section

scholarship). Also see Pub. 15-A and Pub. 970. These

409A, added by the American Jobs Creation Act of 2004,

payments are subject to income tax withholding. However,

provides that all amounts deferred under a nonqualified

their taxability for social security and Medicare taxes

deferred compensation (NQDC) plan for all tax years are

depends on the nature of the employment and the status of

currently includible in gross income unless certain

the organization. See Students in section 15 of Pub. 15

requirements are met. If section 409A requires an amount to

(Circular E).

be included in gross income, the section imposes a

Sick pay. If you had employees who received sick pay in

substantial additional tax. Section 409A, generally, is

2006 from an insurance company or other third-party payer

effective with respect to amounts deferred in tax years

and the third party notified you of the amount of sick pay

beginning after December 31, 2004, but deferrals made

involved, you may be required to report the information on

prior to that year may be subject to section 409A under

the employees’ Forms W-2. If the insurance company or

some circumstances.

other third-party payer did not notify you in a timely manner

The Act requires reporting of the yearly deferrals (plus

about the sick pay payments, it must prepare Forms W-2

earnings) under a section 409A nonqualified deferred

and W-3 for your employees showing the sick pay. For

compensation plan, using code Y in box 12.

specific reporting instructions, see Sick Pay Reporting in

Income included under section 409A from a nonqualified

section 6 of Pub. 15-A.

deferred compensation plan will be reported in box 1, and in

SIMPLE retirement account. An employee’s salary

box 12 using code Z. This income is also subject to an

reduction contributions to a SIMPLE (savings incentive

additional tax reported on Form 1040. For more information,

match plan for employees) retirement account are not

see section 5 of Pub. 15-A.

subject to income tax withholding but are subject to social

Railroad employers. Railroad employers must file Form

security, Medicare, and railroad retirement taxes. Do not

W-2 to report their employees’ wages and income tax

include an employee’s contribution in box 1 but do include it

withholding in boxes 1 and 2. Electronic reporting may be

in boxes 3 and 5. An employee’s total contribution also must

required; see Electronic reporting on page 3.

be included in box 12 with code D or S.

If an employee is covered by social security and

An employer’s matching or nonelective contribution to

Medicare, also complete boxes 3, 4, 5, 6, and 7 of Form

an employee’s SIMPLE is not subject to income tax

W-2 to show the social security and Medicare wages and

withholding or social security, Medicare, or railroad

the amounts withheld for social security and Medicare taxes.

retirement taxes and is not to be shown on Form W-2.

On the Form W-3 used to transmit these Forms W-2, check

See Notice 98-4, 1998-1 C.B. 269, for more information

the “941” box in box b.

on SIMPLE retirement accounts. You can find Notice 98-4

For employees covered by RRTA tax, you also must

on page 25 of Internal Revenue Bulletin 1998-2 at

report the Tier I and Tier II taxes withheld in box 14 of Form

W-2. Label them “Tier I tax” and “Tier II tax.” Boxes 3, 4, 5,

Successor/predecessor employers. If you buy or sell a

6, and 7 apply only to covered social security and Medicare

business during the year, see Rev. Proc. 2004-53 for

employees and are not to be used to report railroad

information on who must file Forms W-2 and employment

retirement wages and taxes. On the Form W-3 used to

tax returns. You can find Rev. Proc. 2004-53 on page 320 of

transmit these Forms W-2, check the “CT-1” box in box b.

Internal Revenue Bulletin 2004-34 at

Repayments. If an employee repays you for wages

irs-irbs/irb04-34.pdf.

received in error, do not offset the repayments against

Terminating a business. If you terminate your business,

current year’s wages unless the repayments are for

you must provide Forms W-2 to your employees for the

amounts received in error in the current year. Repayments

calendar year of termination by the due date of your final

made in the current year, but related to a prior year or years,

Form 941. You must also file Forms W-2 with the SSA by

must be repaid in gross, not net, and require special tax

the last day of the month that follows the due date of your

treatment by employees in some cases. You may advise the

final Form 941. If filing on paper, make sure you obtain

employee of the total repayments made during the current

Forms W-2 and W-3 preprinted with the correct year. If filing

year and the amount (if any) related to prior years. This

electronically, make sure your software has been updated

information will help the employee account for such

for the current tax year.

repayments on his or her federal income tax return.

However, if any of your employees are immediately

If the repayment was for a prior year, you must file Form

employed by a successor employer, see Successor/

W-2c with the SSA to correct only social security and

predecessor employers above. Also, see Rev. Proc. 96-57,

Medicare wages and taxes. Do not correct “Wages” in

1996-2 C.B. 389 for information on automatic extensions for

box 1 on Form W-2c for the amount paid in error. For

furnishing Forms W-2 to employees and filing Forms W-2.

information on reporting adjustments to Form 941, Form

You can find Rev. Proc. 96-57 on page 14 of Internal

943, or Form 944, see section 13 of Pub. 15 (Circular E) or

Revenue Bulletin 1996-53 at irs-irbs/

section 9 of Pub. 51 (Circular A).

irb96-53.pdf.

Tell your employee that the wages paid in error in a

Get Schedule D (Form 941), Report of Discrepancies

TIP

prior year remain taxable to him or her for that year.

TIP

Caused by Acquisitions, Statutory Mergers, or

This is because the employee received and had use

Consolidations, for information on reconciling wages

of those funds during that year. The employee is not entitled

and taxes reported on Forms W-2 with amounts reported on

to file an amended return (Form 1040X) to recover the

Forms 941, Form 943, or Form 944.

income tax on these wages. Instead, the employee is

USERRA makeup amounts to a pension plan. If an

entitled to a deduction (or a credit, in some cases) for the

employee returned to your employment after military service

repaid wages on his or her Form 1040 for the year of

and certain makeup amounts were contributed to a pension

repayment.

plan for a prior year(s) under the Uniformed Services

Scholarship and fellowship grants. Give a Form W-2 to

Employment and Reemployment Rights Act of 1994

each recipient of a scholarship or fellowship grant only if you

(USERRA), report the prior year contributions separately in

-7-

Instructions For Forms W-2 And W-3 - Wage And Tax Statement And Transmittal Of Wage And Tax Statements - 2006 Page 11

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