Income received this year, but reported by employer for previous years on corrected W2s?
This is a weird situation, maybe someone can help. My husband's employer took out pre-tax state pension contributions at the wrong rate for the last few years. This was a mistake on their part. These were mandatory contributions, the pension contribution rate is statutory and not chosen by the employee. They took out more from his pay than they were supposed to.
When the mistake was discovered, they paid all the incorrectly withheld money back to us, earlier this year. I knew the money we got back would be taxable, but I assumed it would be taxable for 2025, since that is when the money was received. But this week, we received corrected W2 forms for the previous years, with some of the refunded amounts that were incorrectly taken out of the pay for those years (and paid back to us this year) reported as taxable income in the years when it was earned.
Is this correct, or should the money be taxable this year (2025) since that is the year it was received? Obviously, they think it is correct, or they wouldn't have done the corrected W2s. But since they have made a few mistakes so far (including taking out the wrong amount for years to begin with) I want to confirm this is how this is supposed to be handled. It seems off that we would owe taxes on money for a previous year, if that money was not available to us during that year. Yes, it should have been paid to him in paychecks for those previous years… but it wasn't. It was paid this year.
Thank you for any suggestions you can provide about the correct way for this to be handled!
Answers
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Hi superblyrebird,
The IRS says that "income is taxable when you receive it." That is a simplified answer but applies to most income received.
It's possible that your husband's employer issued corrected W-2 forms because it made their own record-keeping line up better, but in many cases, that income would actually be taxable in the year you received it (2025), not the year you should have received it.
That being said, there are some situations where the income would be taxable in the year of the excess contribution. For example, when excess 401(k) contributions are made, the excess 401(k) contribution amount is supposed to be added to the income in the year of the contribution. So, depending on the type of pension plan, your husband's employer may have correctly changed the prior year W-2 forms to correct this. Again, I suggest contacting his employer to ask about the type of plan to confirm that this was the correct way to handle the mistake.
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Thank you so much rachels. I think you are right, we need to contact the employer (and maybe also the state pension plan, Cal PERS) to get more information.
I guess if it was taxable in the previous years, then we will have to do amended tax returns. I just hope we don't owe additional penalties for not reporting that income during those years or having withholdings from it, since there would have no way for us to do that at the time.
I guess I will wait to see what the employer and the pension plan say.
thank you again :)
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I'm glad I could help!
Yes, if those W-2s are correct, you'll likely need to amend the prior years to report that excess as taxable for each of those years. Depending on the amount that is being added back to the income for those prior year returns, there may be some interest for late payment of tax.
If the IRS ends up sending you a notice assessing a penalty: You may potentially be able to dispute penalties assessed by the IRS for this situation, since you only recently got the information to report this income.1
