In final regulations set to take effect for 2020 Forms W-2, the IRS gives employers the option of using truncated Social Security numbers (SSNs) on employee Forms W-2 issued after December 31, 2020. The new rules are an attempt to assist employer efforts to protect confidential employee identification information from identity theft.
Under final Treas. Reg. § 301.6109-4, the first five digits of an employee’s SSN may be redacted on the employee copy of Form W-2 (designated Copies B and C). Referred to as a truncated taxpayer identification number (TTIN), the TTIN should appear in the same format as the identifying number it replaces; for example, XXX-XX-1234 when replacing the nine-digit SSN on the employee copy of Form W-2. Employers that follow the new TTIN rules will not be subject to any penalty for failure to include a correct taxpayer identifying number on a payee statement (i.e., the employee copy of Form W-2).
However, an employer must continue to report an employee’s complete taxpayer identification number (e.g., 123-45-6789) on the copy of Form W-2 filed with the Social Security Administration (designated Copy A). Also, the employer may not truncate its employer identification number (EIN) on any copy of Form W-2.
Presumably, the 18-month transition period will allow state and local governments and payroll tax reporting software vendors time to adapt to the new rules. Currently, not all states allow TTIN reporting, so employers should consider how state and local government information reporting will be impacted before deciding whether to implement TTIN reporting practices. Employers should also begin to coordinate with their payroll tax reporting software vendors sooner rather than later, as systemwide changes can often take considerable time to implement.
The final regulations adopted the 2017 proposed regulations without substantive change, even though some commenters objected to the proposed regulations on grounds of increased administrative burdens, particularly in situations where state and local governments do not allow for truncated taxpayer identification on information statements. The US Department of the Treasury rejected commenter objections, in part, because the permissive (and not mandatory) nature of the rule change gives employers flexibility in determining whether to adopt TTIN reporting practices.