Q. (cont.) ... that there are two current employees and two terminated employees that have unsubstantiated debit card claims on their accounts for 2016. We have exhausted all efforts to get these current and past employees to substantiate the claims. All of these claims are for the calendar year 2016.
Can we add these amounts to the current employees' 2017 W-2s, or will we need to amend those 2016 W-2s on the two employees that are current employees? For the terminated employees, do we send them a 1099 for 2016, or can we include them in our 2017 filling of the 1099s?
A. I spoke with IRS information agent Mrs. Lamb (ID# 1001306657) on this matter.
First, regardless of whether the individuals in question are now employed by you, or formerly employed by you, you will issue W-2s. The IRS is very clear about "Once an employee, always an employee," as least as far as employment tax matters go. This information is contained within this regulation: https://www.law.cornell.edu/cfr/text/26/31.3121%28a%29-1
Secondly, for future reference, even if you were able to get the individuals to substantiate the charges now, the "reasonable period" that qualifies them as part of an accountable plan--and therefore exempt from employment taxes--has elapsed. (What is considered reasonable for accounting for expenses is defined as 60 days after the expenses were paid or incurred.) That information is here: https://www.irs.gov/publications/p463/ch06.html#en_US_2016_publink100034114.
As to whether to issue corrected W-2s for 2016, or additional 2016 W-2s only for the unsubstantiated charges, that's your choice. However, you must issue 2016 W-2s, and not include these amount on 2017 W-2s, since the amounts were actually paid out in 2016.
As to the required tax withholding, which extends to federal and state income tax and social security tax, you will probably end up having to pay these out of the company's pocket, since I assume you paid the employees the full amount of the expense without withholding. Mrs. Lamb referred to Publication 15-A (https://www.irs.gov/pub/irs-pdf/p15a.pdf), which gives examples and tables about how to calculate those amounts.