In late 2012, the National Labor Relations Board (NLRB) ruled in an unfair labor practice case that when lump-sum back pay awards span more than one year, the employer must report the awards to the Social Security Administration (SSA) and reimburse employees for the excess federal and state income taxes that are attributable to those awards. The NLRB’s General Counsel later issued a memorandum, which is binding on all NLRB regional offices, confirming these procedures.
Upshot: Companies on the losing end of an unfair labor practice case must now routinely comply with the memo’s mandates. (Latino Express, Inc., 359 NLRB No. 44, 2012; GC Memorandum, 13-03, 2-15-13)
Reporting back pay. All back pay awards, regardless of how many back years the awards represent, are reported to the employee and the SSA on the current year’s Form W-2. Key: This is true even if the employee has terminated. If you’re not caught in the NLRB’s net, additional reporting of awards that span more than one year to the SSA is optional, but recommended. Reason: The SSA can’t properly apportion the award to the calendar quarters during which the wages would have been earned. That, in turn, could affect the amount of the employee’s retirement benefits.
Reporting instructions for lump-sum back pay awards are contained in IRS Pub. 957, which is available at the IRS’ Forms and Pubs page on its website. The General Counsel has created a form that’s similar to one found in Pub. 957, and that must be filed with the SSA; point your browser to the NLRB's website and click on GC 13-03, Attachment 2.
Figuring the excess taxes. Since a lump-sum award could vault the employee into a higher tax bracket, the memo requires employers to reimburse these so-called excess taxes. Excess taxes are the difference between the amount of federal and state income taxes due for the year the back pay award is made and the federal and state income taxes that would have been due if the lump-sum award was paid as regular wages over those years.
Trap: Employers’ payment of employees’ taxes is, itself, taxable to employees. The counsel’s memo calls the tax owing on the excess taxes incremental taxes. To comply with the memo, therefore, you must gross up the taxes.
PRACTICE TIP: According to the NLRB, these two items are remedial, which means they apply retroactively to all pending cases. Bottom line: It’s to Payroll’s advantage to stay in the loop during any NLRB proceeding. That way, you can advise the company’s legal counsel and upper of the amounts involved. And while the memo notes that there’s an Excel program that can calculate your tax liability, it would be prudent to run the numbers yourself.