When an employer and its payroll service each make payments to employees, each must file W-2s. The IRS made this ruling in a legal memorandum.

The memorandum, which may affect your company or clients, was issued to auditors who faced the following obstacles:

Employers that use a payroll firm, or agent, to pay employees and handle payroll tax deposits and returns also make payments to employees during the taxable year.

Situations in which these payments might occur include:

  • An employer that has not used a payroll service or agent retains one after the start of the taxable year.
  • An employer using a payroll service or agent terminates it and takes over its own payroll processing after the start of the taxable year.
  • The employer makes payments in addition to salary payments issued by the payroll firm.

In these cases, the employer and payroll service or agent must each issue its own W-2 using its own EIN.

The IRS legal memo covered only payroll firms hired during the tax year, the same rule should apply in the other two situations.