Payroll Services Mailbag: New W-4, tax-free achievements & gifts and more

It’s been a busy first quarter for payroll. Our expert pay and tax attorney Alice Gilman addresses readers’ questions on everything from the new w-4 to taxable prizes.

Are substitutes for SSNs now allowable on the new W-4 form?

Question: A new employee has written in her employee ID, instead of her Social Security number, on her 2020 W-4. We don’t see any space on the new W-4 for an employee ID number. Is this something new with the new form?

Answer: No. The rules about including Social Security numbers on W-4s haven’t changed—employees must enter their SSNs on their W-4s. In the short-term, since the employee hasn’t presented you with a valid form, you must withhold federal income taxes as if she is single and claimed no other adjustments on her form (i.e., as if she checked the single box in Step 1 and signed the form in Step 5).

For the long-term (i.e., your 2020 W-2s), you can zero-fill Box a of her W-2 if you still don’t have her SSN, but you’re also going to need to provide the IRS with proof that you tried diligently to obtain her SSN. You do this by asking her to complete another W-4 by the end of this year. If she still refuses to comply, your next solicitation must be made by Dec. 31, 2021. If you take those steps, you’ll be off the hook for penalties for filing a W-2 without an SSN.

Which W-4 form for rehires: the original, or must they refile using 2020 form?

Question: We hired a college student part-time to help out during the holidays. He left at the end of December to go back to school. We told him we’re interested in rehiring him over his spring break and then again during the summer. Can we still use his 2019 W-4 or must he refile the 2020 form?

FLSA Compliance D

Answer: One way to cycle out of pre-2020 W-4s is to not permit employers to look back at them. The IRS now says rehires must file the 2020 form. This is a departure from the old rule, which allowed you to use a rehired employee’s old W-4, provided the company had not completely severed ties with the employee.

STATE W-4 UPDATE: The chart below updates the states that require or allow employees to file W-4s to determine state withholding. Need more 2020 W-4 insight? Point your browser to and download our free report.

Age before taxes on group-term life?

Question: We were in the process of imputing the value of group-term life insurance exceeding $50,000 into a retired employee’s income when he called and asked if there was a reduced rate for seniors, since he’s in a lower tax bracket now. We looked all over the IRS’ website, but couldn’t find an answer. Is there a reduced rate for seniors?

Answer: Unfortunately, no, there is no senior discount for group-term life insurance provided to retirees. The IRS’ Table 2-2, in Pub. 15-B, lists the cost of group-term life insurance protection for one month. The last age entry in the table is 70 and over.

You might want to rethink the amount of group-term insurance you’re providing to retirees. If you provide the standard $50,000, there’s nothing to impute or report on W-2s. Flip side: You must provide W-2s if you provide more than $50,000 in group coverage. Enter the uncollected Social Security taxes in Box 12, with Code M and the uncollected Medicare taxes in Box 12, with Code N.

Taxable or not: jackets with company logos?

Question: One department gave away jackets with the company’s logo to employees as prizes. The jackets are generally valued at $200. Can we exclude the value of the jackets from employees’ income as de minimis fringe benefits?

Answer: Probably not; the $200 is taxable and reportable on employees’ W-2s as wages. De minimis fringes are items of low value that are made available to employees on such an infrequent basis that it’s administratively difficult to account for them. Jackets valued at $200 don’t seem to fit this bill.

Since it’s too late to withhold taxes, you’ll have to gross up. To gross-up, use this formula: $200 (fair market value of the jacket) ÷ (1 − 0.22 − 0.0765) = grossed-up pay. Don’t forget to include the state tax rate in the denominator. If employees have maxed out on Social Security taxes, include only the appropriate Medicare rate (0.0145 or 0.0235) in the denominator.

Are leave donations to a local charity taxable?

Question: Employees’ annual leave is front loaded in January, so employees are 100% vested at the beginning of the year. An employee wants to donate the value of her time to a local tax-exempt organization. Is she taxable on this amount?

Answer: Yes. This employee will be taxable when you donate her time.

The IRS does allow tax-free leave sharing donations, but under very limited circumstances, and only to other employees. Under the first, employees may donate unused time tax-free to other employees who are dealing with medical emergencies. Under the second, employees may donate time tax-free to employees who are caught up in the aftermath of a natural disaster. In both cases, the recipients are taxable on the time donated.

What qualifies as a tax-free achievement award?

Question: A new company program recognizes employees’ community service with a $500 check. Does this check need to be taxed or does it fall under achievement awards, since it’s less than the $1,600 limit?

Answer: The $500 is fully taxable to the employee. Employee achievement awards are tax-free to employees, but the achievement must qualify as either a safety achievement award or a length-of-service award. Here, the achievement is for community service, which isn’t work-related.

And even if the award was for safety achievement or length of service, it would still be taxable, because it’s cash. Tax-free awards must be tangible property, like that watch you receive on your 25th work anniversary.