How do we enter a gross-up on a W-2?

Q: The company offers stock to employees, which becomes taxable at a later date. Employees who terminate during the year are still eligible for the stock, but, since there are no longer wages from which we can withhold, we gross up the FICA taxes. On their W-2s, we make entries in Boxes 1, 3, 4, 5 and 6. Management is questioning why, if we’re only paying the FICA taxes, all of those boxes are increased. Now we’re not so sure if we’ve been doing this right. Who’s correct?

A: You are. Grossing up for taxes means that you’re paying the employee’s taxes, and that itself is taxable. So completing Box 1 is mandatory. Assuming the stock isn’t related to an exercise of a nonqualified stock option, no entry is made in Box 2. But the FICA-related boxes—Boxes 3 – 6—must, obviously, be completed.