Back pay and payroll taxes: what the employer withholds

The rule in the publication

The section is short, and each sentence matters. Treat back pay as wages in the year paid and withhold and pay employment taxes as required. Then comes the exception for awards: if back pay was awarded by a court or government agency to enforce a federal or state statute protecting an employee’s right to employment or wages, special rules apply for reporting those wages to the Social Security Administration. They also apply to litigation actions and settlement agreements or agency directives resolved out of court and not under a court decree or order. The statutes the publication names as examples include the National Labor Relations Act, the Fair Labor Standards Act, the Equal Pay Act and the Age Discrimination in Employment Act, and it says the list is not exhaustive.

Year paid, not year earned

The practical core is the year-paid rule. Back pay for work done or wages owed in 2024 but paid in 2026 is 2026 wages for withholding and deposit purposes. That affects three things. The payment goes on the 2026 payroll records and Form 941 for the quarter it is paid. The 2026 rates and wage bases apply, so social security tax stops once the employee’s 2026 wages reach $184,500 and FUTA applies only to the first $7,000, both figures printed in the publication. And the Medicare tax has no wage base cap, so it applies to the whole payment.

The publication separates this general rule from the special reporting rules for awards enforcing a wage or employment statute. Those rules exist so that the Social Security Administration can credit earnings to the years in which they should have been earned. For that reporting, the publication refers you to Publication 957, Reporting Back Pay and Special Wage Payments to the Social Security Administration, and to Form SSA-131, Employer Report of Special Wage Payments. We have not summarized those documents here, because the details are theirs.

Worked example

An employee has been paid $177,500 in 2026 wages when the employer pays $10,000 of back pay. Social security wage base room is $184,500 minus $177,500, or $7,000, so only $7,000 of the back pay is subject to the 6.2% employee social security tax ($434). All $10,000 is subject to the 1.45% Medicare tax ($145). FUTA wages are $0, because the employee is already past the $7,000 FUTA base. Enter 177500 and 10000 to see it. The same arithmetic with a different employee, who has $20,000 of 2026 wages so far, gives social security wages of the full $10,000 ($620 tax) and FUTA wages of $0, because $20,000 already exceeds $7,000.

The calculator shows the employee half of social security and Medicare. The employer pays a matching half, and FUTA is employer-only. Federal income tax withholding on back pay is not computed here, since it depends on the employee’s Form W-4 and on how the payment is treated as supplemental wages; the section of Publication 15 on supplemental wages governs that.

What this does not decide

Whether a settlement payment is back pay at all, whether any part is something other than wages, and how a particular award must be reported to SSA are matters for the underlying document and the publications named above. Also, state law may require different treatment for state taxes and wage payment timing. This page covers the federal employment tax rule as stated in Publication 15-A.

A short employer checklist

Identify whether the payment is back pay owed to a current or former employee. Confirm whether it was awarded by a court or agency, or settled, under a statute protecting the right to employment or wages; if so, get Publication 957 and Form SSA-131. Otherwise treat it as wages in the year paid. Withhold and deposit on the payment date using the current-year bases. Report it on Form W-2 for the year paid and on Form 941 for the quarter paid. For rates, see our FICA tax calculator; for deposit timing, the payroll deposit schedule.

Sources

• IRS Publication 15-A, Employer’s Supplemental Tax Guide (2026): section 5, Wages and Other Compensation: Back Pay. Read November 2, 2026.

Edition read: Publication 15-A (2026), for use in 2026. Rates, wage bases and dollar limits on this page are the 2026 figures printed in that edition; check the current publication and the IRS employment tax pages for your tax year. This page summarizes the publication and does not replace it.