IRS Fact Sheet Causes Reporting Confusion

Congress created pandemic-related sick and family leave refundable credits for eligible employers. The rules apply slightly differently for leave taken 1) before April 1, 2021 (“Initial Period”) and 2) from April 1, 2021 through September 30, 2021 (“Voluntary Period”). In each period, the IRS allowed eligible employers to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit such amount with the IRS.

Penalty Protection Unclear

In IRS Fact Sheet 2022-15 (which covers the Voluntary Period) and IRS Fact Sheet 2022-16 (which covers the Initial Period, including a mandatory period through Dec. 31, 2020), the IRS describes the circumstances under which employers must provide employees with Forms W-2c if the employer took the payroll credits. Unlike other FAQs, taxpayers cannot rely on these FAQs for penalty protection.

In recent updates, both IRS Fact Sheets “clarify” that if an employer pays pandemic-related paid leave wages to employees in 2022 for paid leave taken in the Initial/Voluntary Period, then the employer needs to issue a Form W-2c to correct employees’ 2020 or 2021 W-2s, even though the employer is paying these wages in 2022. At the same time, the 2022 Q1 Form 941 Instructions, Line 3 indicate that employers should have withheld from qualified sick/family leave wages paid in 2022 for leave taken during the Initial/Voluntary Period.

Report and Identify Carefully

Accordingly, if these amounts are taxable to employees in 2022 like other wage payments, conventional payroll procedures would dictate the employer report these wages on an employees’ 2022 W-2s, not Form W-2c, which the fact sheets require. To reconcile, the employer could report the wages twice, on W-2c for the earlier year plus on a 2022 W-2, but this would be a nonsensical solution.

In sum, the new guidance contained in the IRS Fact Sheets is confusing and impossible to decipher without more guidance. Given the uncertainty, a conservative approach may be to withhold and report this year and separately identify these wages. Then, assuming IRS issues clarifying guidance, the employer can adjust accordingly.

Employer Compliance & Form 941

While TaxMe cannot resolve this outstanding W-2 v W-2c dilemma, TaxMe has automated the Form 941 filing process and can help you e-file Form 941. If you need help, don’t wait. The second quarter filing deadline is Monday, May 2, 2022.

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