Get Publication 957 - Internal Revenue Service

It is not taxed at a higher rate, it was withheld at a higher rate because payroll software thinks you make that much money every single pay period. You will get any overpayment back when you file your tax return next year; you don't actually pay more taxes.

Even if you don't file a tax return, the IRS can still find you from data they collect from third-party bank and credit info.

SSA stores some of the W-2 information as administrative data; most of it is sent to the IRS . The W-3 is a summary form that contains aggregate earnings information for all employees in the wage report.

Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable.

SSDI back pay is the amount of money that the SSDI owes you from the delay caused by their processing time. ... Retroactive pay is a period of up to one year prior to your application date for which the SSA will pay you SSDI benefits, assuming that you were eligible at that time.

Just like with normal pay, you need to withhold Social Security, Medicare, and applicable state and local taxes from retroactive pay. Income tax is where it's a little different for retroactive pay. The IRS considers retroactive wages supplemental wages, or money paid to an employee outside their normal salary.

The U.S. Supreme Court has ruled that awards of back wages to employees are subject to federal taxation according to the year in which the wages are actually paid, not the year in which the wages should have been paid or were actually earned.

Submit Form SSA-131 to the SSA office nearest your place of business. Or, the employee can submit it to the SSA office handling the claim. You or the employee must submit this form before the SSA can exclude the special wage payments for purposes of the earnings test.

You can use the percentage method if you give retroactive pay on its own. Under the percentage method, withhold a flat 22% for federal income taxes. Use the aggregate method if you add the employee's retro pay to their regular wages for the following period.

However, for income tax purposes, the IRS treats all back pay as wages in the year paid. Employers should use Form W-2, Wage and Tax Statement, or electronic wage reports to report back pay as wages in the year they actually pay the employee.