Payroll in Practice: 6.26.2023

Question: Payments to an independent contractor who fails to provide a tax ID number are subject to 24% backup withholding. Is there a similar requirement when a recently hired employee does not provide a Social Security number?

Answer: It is correct that a business is required to apply 24% backup withholding from certain payments made to a nonemployee when the payee does not provide a tax ID number in the required manner. Backup withholding is also required if the IRS notifies the payer that the ID number provided is incorrect. However, this 24% backup withholding does not apply to employees who fail to provide a Social Security number.

The 24% backup withholding rate applies to certain payments made to nonemployees. For example, a business may have to apply backup withholding on payments reported on Form 1099-NEC, Nonemployee Compensation, as well as payments reported on Form 1099-MISC, Miscellaneous Information, such as rent and payments to health care providers; third-party transactions reported on Form 1099-K, Payment Card and Third Party Network Transactions; and investment income, such as interest and dividends.

Backup withholding does not apply to employees’ wages. Instead, the amount to withhold from wages is based on the employee’s Form W-4, Employee’s Withholding Certificate, and relevant tax tables. If an employee does not provide the employer with Form W-4 or provides an invalid form, the employer is to withhold income tax based on the regular withholding tables and specified withholding factors.

If an employee who was paid wages in 2019 has not provided a valid Form W-4, the employer is to withhold income tax as if the employee had claimed single marital status and zero withholding allowances on a 2019 Form W-4. However, if the employer has an earlier valid Form W-4 from the employee, withholding should be based on that form as it remains in effect until replaced.

If an employee was first paid wages after 2019, including those paid to a worker who previously worked for the employer and was rehired after 2019, the employer is to withhold as if the employee had claimed single or married filing separate status and made no entries in Steps 2,3, and 4 on a Form W-4 from 2020 or later.

The employer must issue a Form W-2, Wage and Tax Statement, to the employee and file it with the Social Security Administration even if the employee has not provided a SSN or has provided an incorrect number. Where no number was provided, the employer is to leave Box a of a paper Form W-2 blank or enter all zeros in the SSN field for an electronically filed Form W-2. If the number is incorrect, the employer should enter the number as provided by the employee.

Because an incorrect or missing SSN on Form W-2 can result in penalties for failure to file or failure to furnish a correct information return, the employer should document all efforts made to obtain the correct number. This includes the initial request for Form W-4 and at least two annual requests for the correct number. This should establish due diligence on the part of the employer and constitute reasonable cause for avoiding the penalties.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.