Recent Treasury guidance permitting employers to defer employee Social Security taxes has been widely reported in the media. On August 8, 2020, the President of the United States issued a Presidential Memorandum deferring the withholding of and payment of the employee share of social security taxes for the period beginning on September 1, 2020, and ending on December 31, 2020. For employers that elect to allow employees to defer, the due date for the withholding and payment is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021.
Wages are eligible for the deferral only if the wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold if employees are paid on a different frequency (e.g., daily, weekly, monthly)
Many employees are now asking their employers about payroll tax deferral, such as whether the employer plans to offer the option and how it might affect them. If you are planning to offer your employees the option to defer their payroll taxes, here are some points to aid you and your employees with the decision.
Share these considerations with employees:
Your employer may not offer the payroll tax deferral option.
- It is the employer’s choice whether to offer the deferral.
- If your employer offers it, they may ask you whether you want to take the deferral.
It is only a delay.
Any amounts that you do not pay from September through December will be withheld from your pay starting in January.
Your net pay could increase by 6.2% through December.
- Social Security tax is 6.2% of your wages (up to $137,700 for 2020).
- But in January, your wages could decrease by about 6.2% to repay the payroll tax deferral (in addition to the other normal taxes and deductions that will apply). It won’t be exactly 6.2% in most cases.
Employers that offer the deferral will generally withhold the taxes deferred in even amounts from January 1 – April 30, 2021.
But, if you change jobs, your employer may withhold the full amount deferred from your last check. If so, this could take up almost half of your last paycheck (in addition to other taxes and deductions).
You may not qualify for payroll tax deferral for every paycheck.
- It only applies if the amount you earn is less than $4,000 bi-weekly (or equivalent amounts for other pay schedules).
- If you receive other payments such as commissions or bonus in the same pay period, the combined total may result in no deferral.
There is no phase-out for those with earnings close to the $4,000 limit.
Someone earning $3,999 in a biweekly pay period would qualify for deferral, but someone earning $4,000 would not.
- Is Retroactive Deferral Possible? The deferral period started 9/1/20, but many payroll vendors were unable to update their systems to account for deferral by that date. (Some systems had to be revised to not withhold the tax, but still track the corresponding earnings.) Absent contrary guidance from the IRS, employers should approach deferral on a go-forward basis.
- What If the Tax Is Forgiven? As discussed earlier, employers have great flexibility in determining how to implement the payroll tax deferral. They can defer for certain groups of employees or require employees to consent before amounts are deferred. In situations where employees could have deferred, but decided not to, do employers have any obligations to those employees if Congress passes legislation to permanently forgive deferred amounts? It’s tough to say at this point, and there’s no guarantee that a bill will ever be passed.
- Will Form W-2 Reporting Be Affected? At this point, the IRS hasn’t determined how the employee Social Security tax deferral and recoupment will be reported on Form W-2. Another question that has arisen is whether a Form W-2c would be required for 2020 if an employer pays the 2020 Social Security tax deferral on behalf of their employees in 2021 (i.e., through a gross-up). Again, the IRS is still working out the details on this one.
For employers who elected to allow employees to defer social security taxes for the last quarter of 2020, the IRS has now issued instructions for how to handle W-2 filings. An employer that deferred an employee’s portion of Social Security tax should report total Social Security wages paid to the employee (including any wages for which withholding of Social Security tax was deferred) on Form W-2 in box 3 (Social Security wages) and/or box 7 (Social Security tips). Any (Social Security withheld) any Social Security tax that was not actually withheld should not be included in box 4 of the W-2.
To pay the deferred employee portion of Social Security tax, the employer will ratably withhold the amount of Social Security tax deferred from the employees’ paychecks from January 1, 2021 through April 30, 2021. Once the withholding is completed, the employer will need to file with the IRS, and issue to the employee, a Form W-2c, Corrected Wage and Tax Statement, when the employee’s deferred 2020 Social Security tax is withheld from the employee’s pay in 2021. Paper Forms W-2c should be filed with the Social Security Administration, along with Form W-3c, Transmittal of Corrected Wage and Tax Statements, as soon as possible.. Copies of Forms W-2c should also be provided to employees.