Final regulations from the Internal Revenue Service (IRS) give employers decision-making rights on whether to truncate their employees’ Social Security Numbers (SSN) on Form W2, Wage and Tax Statement. The rule, which began its journey in 2017 as a set of proposed regulations, is another step in the right direction toward protecting employees from identity theft. In the final rulemaking document, the IRS further defines the application of truncation rules and even provides an example of provisional allowance.
While the IRS already allows truncation on employees’ Form 1095-C for Affordable Care Act reporting and other tax related statements, beginning in 2021, employers will also be able to mask SSN and TIN numbers on employee forms. The final rules apply to returns, statements, and other documents required to be filed or furnished after Dec. 31, 2020. If a business decides to adopt this procedure, they can mask SSN and TIN numbers as follows:
The regulation, though intended for the common good, is not free from criticism. When the recommendation was still a proposal, concerned parties suggested that truncating SSNs would interfere with a taxpayer’s and tax preparer’s ability to verify the authenticity of the SSN appearing on their copy of Form W2. Further complaints reflected concern over the difficulty that might arise when identifying and correcting mistakes in lifetime earnings, the challenge to provide proof of income to lenders, and the confusion that might ensue when employees receive multiple W2s, some with truncated SSNs and others with exposed SSNs.
Employers that want to move toward this security measure need to consider their approach.
- Do you want to automatically truncate on the W2, or will you leave the decision up to your employee?
- Will the state and local agencies where you operate adopt these regulations?
- Will your payroll provider be able to accommodate truncation?
Depending on what kind of answers you receive on the above concerns, you may need to prepare to support both truncated and full-version identification numbers. If you have questions about how this regulation will affect your business or how to communicate these rules to your employees, give the professionals in our office a call today.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.