Bonuses PAID in 2023 on a 2022 W-2?

We have an employer who wants a projection for a 2022 profit sharing contribution. Client insists that the bonus being PAID in February or March of 2023 (which is based on 2022 compensation) will be reported on the 2022 W-2.

I don't see how this is correct, or possible, and although it isn't our problem (we use the projected figures we are given) and it is only a projection, I'd still like to confirm that I'm not crazy (on this issue - be nice!)

Sounds whacky to me.

Yeah - we said they should check with their payroll/corporate tax advisor before we proceed. I'm sure the answer will come back as we expect, but I thought I'd see if anyone here had ever heard of such a thing. I'm not a CPA.

Every bonus I've ever received paid late Feb or early March has shown up on my W2 for the year in which it was paid. The employer may be able to deduct it on an accrued basis (I don't know, not my job) but that treatment does not apply to the employees. 

The Form W-2 Instructions tell a payer to report in box 1: “Total wages, bonuses (including signing bonuses), prizes, and awards paid to employees during the year.”

A related instruction states: “Calendar year basis. The entries on Form W-2 must be based on wages paid during the calendar year.  . . . .  For example, if the employee worked from December 18, 2022, through December 31, 2022, and the wages for that period were paid on January 3, 2023, include those wages on the 2023 Form W-2.”

https://www.irs.gov/forms-pubs/about-form-w-2 (emphasis added).

A retirement plan’s administrator (not a TPA) might want its lawyer’s advice about whether the administrator must not rely on an employer’s W-2 reports if the administrator knows those reports are incorrect.

I've seen an instance where a CPA insists that their client, being an LLC that is not being taxed as a corp, can take up until the due date of their business tax return to determine their income and can, therefore, make a deferral from such income anytime up to 3.5 months after the close of the year (and btw does that also mean they could get an extension and make deferrals up until the following 10/15?).  Yes, a little off-topic since there's only SE income, but could this be accurate?     

The employees are cash basis taxpayers, so of course it's compensation to them only when they are actually paid. The employer may be confused by the rule that  if it is an accrual basis taxpayer it can deduct for prior year as long as all events test met and actually paid by March 15 of next year (assuming employer is calendar year taxpayer).

I feel like I'm remembering something about a bonus, commission, or similar payment; that if part of a pre-defined program and tied to prior year performance, then as long as it was paid within a few weeks of year end, it would count as compensation towards that prior year.(Not on the W-2 though, just for Plan purposes!)  Not sure if it was limited to a DB plan, but pretty sure my wife benefitted this way under a pension years ago

11 hours ago, Nate S said:

I feel like I'm remembering something about a bonus, commission, or similar payment; that if part of a pre-defined program and tied to prior year performance, then as long as it was paid within a few weeks of year end, it would count as compensation towards that prior year.(Not on the W-2 though, just for Plan purposes!)  Not sure if it was limited to a DB plan, but pretty sure my wife benefitted this way under a pension years ago

Nate S, right, that's what I was alluding to. See Treas. Reg. 1.404(b)-1T, Q&A-2. An accrual basis taxpayer can take a deduction for an amount that would otherwise be considered "deferred compensation" under IRC sec. 404(a)(5) (and therefore only deductible in the year included in income by the employee) if all events to set the legal liability were in place as of the end of the prior taxable year and the amount is paid within 2-1/2 months after the end of the taxable year. But that only addresses the deductibility of the bonus by the employer, if an accrual basis taxpayer. Has nothing to do with when the amount is includible in income and reportable on W-2 for cash basis employee.

25 minutes ago, Luke Bailey said:

Has nothing to do with when the amount is includible in income and reportable on W-2 for cash basis employee.

Agreed on the W-2; something about the income inclusion period is sticking with me though..., might have to go dig up some very old plan docs

30 minutes ago, Nate S said:

Agreed on the W-2; something about the income inclusion period is sticking with me though..., might have to go dig up some very old plan docs

Possibly the "first few weeks" rule of 1.415(c)-2(e)(2)?

If one considers the rule C.B. Zeller mentions, the plan's administration would read carefully the plan's governing document to discern whether the plan's text supports such a measure of compensation.

43 minutes ago, C. B. Zeller said:

Possibly the "first few weeks" rule of 1.415(c)-2(e)(2)?

Good point, C.B. Zeller. Not going to take you into February or March, though, as in OP.

Do you think that the 1.415(c)-2(d) safe harbors pick up the 1.415(c)-2(e)(2) timing rule?

The word "few" is indefinite. Might a plan's administrator interpret "first few weeks" to allow up to two and a half months or by March 15?

43 minutes ago, Peter Gulia said:

The word "few" is indefinite. Might a plan's administrator interpret "first few weeks" to allow up to two and a half months or by March 15?

I did not mean to suggest that March 15, which would usually occur in the 11th week of a calendar year, would be within the "first few weeks" of the year. My reference to the rule was in response to Nate S's comment.

Is anyone aware of any situations in which the IRS, either in a ruling or on audit, found that compensation included under this rule was paid too late in the following year to count as the "first few weeks?"

52 minutes ago, Luke Bailey said:

Do you think that the 1.415(c)-2(d) safe harbors pick up the 1.415(c)-2(e)(2) timing rule?

I think so. Paragraph (d) provides safe harbors for items included in compensation, and paragraph (e) provides timing rules. I read them as being taken in concert with each other.

The discussion has turned from what does or doesn’t belong in a W-2 wage report to whether compensation, for one or more retirement plan purposes, for a year might include something paid after that year.

And that might relate to Belgarath’s originating post about a client’s request for a projection illustrated on an assumption that 2022 compensation will include a bonus paid after 2022 ends.

C.B. Zeller, of course you’re right that you didn’t suggest anything about how 26 C.F.R. § 1.415(c)-2(e)(2) (if relevant at all) or a plan’s definition or provision based on that rule might apply.

I wonder whether a plan’s administrator might interpret “first few weeks” to count a bonus that relates to 2022 services and is paid or delivered as late as by March 15?

And you ask a smart question about some practical consequences if an IRS employee might consider such an interpretation as allowing more than the Treasury department intends the tax-law rule to allow.

3 hours ago, Peter Gulia said:

The word "few" is indefinite. Might a plan's administrator interpret "first few weeks" to allow up to two and a half months or by March 15?

I hope not.

2 hours ago, C. B. Zeller said:

I think so. Paragraph (d) provides safe harbors for items included in compensation, and paragraph (e) provides timing rules. I read them as being taken in concert with each other.

I agree, although they don't really spell it out in the reg. This leads to the interesting situation that many employers who may have adopted the W-2 safe harbor may actually look slightly beyond the participant's actual W-2 for the plan year as long as they adopt a consistent approach.

@C. B. Zeller yes I believe that's the basis for this provision, and also assuming you've otherwise satisfied 1.461-1(a)(2) for accrual deductibility.  I know I briefly worked on one pension plan that used this arrangement, but 20 years later I know I can't locate it.  Otherwise, my wife was employed by Wyeth Pharmaceuticals, their pension would have determination letters and multiple audits over the years (it still survives today as the "Legacy" Pfizer Pension, albeit frozen since 2009).

@Luke Bailey @Peter Gulia no, I don't think the few weeks extended much past the first week of February, if that far.  Based on payroll timing limits, the longest practice application would be end of January.  Biggest reason for the delay that I can think of was for one-time deferral elections.

@BelgarathUltimately, no I don't think such a bonus would be part of the 2022 W-2, those regs are pretty clear that its paid within the limitation year only.  Could it have practical applications to an employer allocation; yes.  Could it be used in a projection; why not, I'll project whatever you pay me to.  Could you use it to manipulate compensation basis for 401(a)(4) testing; maybe if you satisfied 461 accrual rules, felt it meet the 415 timing requirement, and passed 414.

3 hours ago, Nate S said:

no, I don't think the few weeks extended much past the first week of February, if that far.  Based on payroll timing limits, the longest practice application would be end of January.  Biggest reason for the delay that I can think of was for one-time deferral elections.

Nate S, you allude to a really important constraint. State wage laws will only permit a fairly short delay in payment, as you note.