IRS Allows Truncated SSNs on Employees’ W-2s

Masked Social Security numbers help combat identity theft. Here’s what employers need to know about this rule and how it affects Form W-2s.

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How employers can protect employee data with this IRS rule

Form W-2 is no stranger to data breach, which the IRS defines as “the intentional or unintentional release or theft of secure information.”

To combat identity theft, which often stems from data breaches, the IRS issued a final rule permitting employers to voluntarily truncate Social Security numbers on Form W-2s distributed to employees. This means that, as a small employer, you can choose to mask a portion of each employee’s Social Security Number. Or, you can opt to display all 9 digits.

Highlights of the IRS final rule

Published on July 3, 2019, the final rule allows employers to truncate Social Security numbers on employees’ copies of Form W-2s issued after December 31, 2020. The rule is voluntary for employers — whether to adopt it is entirely up to you.

Employers:

  • Can truncate SSNs only on employees’ W-2 copies — i.e., copies B and C
  • Cannot truncate SSNs on Copy A (filed with the Social Security Administration)
  • Can mask the first 5 digits of employees’ SSNs and display only the last 4 digits

The masked digits must appear as either Xs or asterisks. For example, XXX-XX-1234 or ***-**1234.

Background

The Protecting Americans from Tax Hikes Act of 2015 includes various provisions designed to curb fraudulent income tax return filings by individuals who stole taxpayers’ SSNs. One of these provisions grants the IRS authority to truncate SSNs on Form W-2s.

In 2017, the IRS issued a set of proposed regulations regarding the “Use of Truncated Taxpayer Identification Numbers on Forms W-2, Wage and Tax Statement, Furnished to Employees.”

On July 3, 2019, the IRS finalized the proposed regulations. It states that the goal of the new rule is “to aid employers’ efforts to protect employees from identity theft.

On July 3, 2019, the IRS finalized the proposed regulations. It states that the goal of the new rule is “to aid employers’ efforts to protect employees from identity theft.

Note that the IRS already permits employers to truncate SSNs on employees’ copies of Form 1095-C (for Affordable Care Act reporting) and on a few other tax-related forms furnished to employees.

Application date

As mentioned, the final rule applies to Form W-2s distributed to employees after December 31, 2020.

Let’s say an employee terminates in September 2020 and requests a copy of their W-2 upon termination. Under IRS rules, employers must furnish employees with their W-2 “within 30 days of the request or within 30 days of the final wage payment, whichever is later.” 

The final rule applies to Form W-2s distributed to employees after December 31, 2020.
So, the employer must give this terminated employee their Form W-2 in October 2020. In this case, the employer cannot truncate the SSN on the employee’s W-2 copies since the W-2 distribution date is before December 31, 2020.

Where states and localities stand

Whether employers can truncate SSNs on state and local W-2 copies is up to each state and locality to decide. As of this writing, no state or local government has announced approval of truncated SSNs on Copy 1 of Form W-2 — which the employer files with the state, city, or local tax department. Same goes for Copy 2, which the employee uses to file their state, city, or local income tax return.

Employers should not truncate SSNs on copies 1 and 2 of employees’ Form W-2s unless the state and local governments allow it.

Questions to consider regarding the final rule:

  • Will you opt to truncate SSNs on your employees’ copies of Form W-2?
  • If you will truncate SSNs, will you do so automatically for each employee’s W-2?
  • Will you let employees decide on whether their SSNs should be truncated?
  • Will your state and local governments adopt SSN truncation by the end of 2020?
  • If your state and local governments will not support SSN truncation, are you prepared to handle both truncated (federal) and non-truncated (state and local) W-2s?
  • Do you feel that the benefits of truncated SSNs — i.e., greater identity theft protection for employees — outweigh the increased administrative burdens that come with making the change?
  • Do you have access to payroll software that can accommodate truncated SSNs?

Responses to the above questions may vary by small business. For details on how the final rule can impact your small business, consult with a payroll or tax expert.

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