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Final Rule: Employers Can Truncate SSNs on Employees' Form W-2

 

In March 2019, the IRS reported that tax-related identity theft had seen a sharp decline in recent years. However, "the scam remains serious enough to earn a spot on the agency's 2019 'Dirty Dozen' list of tax scams."

On the employment side, identity theft often takes the form of Form W-2/Social Security number data theft — where cybercriminals steal employees' SSNs from the workers' W-2s in order to file fraudulent tax returns or commit other crimes.

To help fight W-2/SSN identity theft, the federal government created a provision in the Protecting Americans from Tax Hikes (PATH) Act of 2015, giving the IRS the authority to allow employers to truncate SSNs on Form W-2s.

In 2017, the IRS released proposed regulations regarding truncating taxpayer identification numbers on Form W-2s distributed to employees. Then, on July 3, 2019, the agency finalized the proposed regulations in a final rule intended to help employers safeguard employees from identity theft.

What you need to know about the final rule

  • Employers can truncate SSNs only on W-2 copies issued to employees — meaning copies B and C.
  • Employers can block out the initial five digits of employees' SSNs and show only the remaining four digits.
  • Employers must use asterisks or Xs to block out the first five digits. For example, ***-**-6789 or XXX-XX-6789.
  • Employers are not allowed to truncate SSNs on W-2 copies filed with the Social Security Administration — meaning Copy A.
  • The final rule covers Form W-2s issued to employees after Dec. 31, 2020.
  • The final rule is voluntary for employers — meaning you can keep displaying employees' full SSNs on their W-2s if you prefer.

State and local positions

The new regulations leave the door open for state and local governments to follow suit. Currently, if you withhold state or local income taxes from your employees' wages, you must file Copy 1 of Form W-2 with the state or local tax department. You must also give the employee Copy 2 of the W-2 to file with his or her state or local income tax return.

If you'd like to truncate SSNs on state or local W-2 copies, make sure your state or locality permits this practice.

Seek expert guidance and secure employee buy-in

For clarification on how the IRS final rule might impact your business — including potential benefits, risks and administrative challenges — consult with a payroll or tax expert. It's also a good idea to get feedback from your employees to see whether they would like to have their SSNs masked on their W-2s.

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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