By: Cynthia Keith – Staff Accountant and Payroll Administrator
As you may know, President Donald Trump sent a memorandum on August 8, 2020 to the Treasury Department to defer collection of the employee portion of Social Security tax from September through the end of 2020 as part of COVID-19 relief. September 1, 2020 marked the first day of the payroll tax “holiday” or deferral period of the employee portion of Social Security tax. On August 28, 2020, the IRS issued guidance to allow employers to suspend withholding and paying eligible employees’ Social Security payroll taxes.
Is the deferral mandatory?
Based on the guidance currently available, the deferral of withholding Social Security taxes from eligible wages appears to be optional for employers. Current guidance does not specifically mandate that withholding of Social Security tax must stop for the period September 1 through December 31, 2020, and Secretary Mnuchin has publicly stated that employers cannot be forced to participate in the deferral program. The Treasury Notice does not provide clear guidance on whether employers choosing to offer the deferral must offer their employees the option to defer or not. Employees also may prefer not to defer, because they may be concerned with owing a large amount that would be withheld in early 2021 in addition to the “normal” 2021 employee Social Security tax.
Is the deferral for all employees?
The payroll tax “holiday” applies only to employees whose wages are less than $4,000 per biweekly pay period (before taxes), including salaried workers earning less than $104,000 per year.
How does an employer defer the Social Security tax?
If you have a payroll provider, please contact them to discuss whether they will be offering the deferral. Your payroll provider will be able to instruct you on how to proceed. If you do not have a payroll provider and opt to defer the tax, you will remove the employee portion of Social Security tax from the employees’ withholdings which will increase their paycheck. When it is time for you to file Form 941, make sure you use the revised version of the form released on August 28, 2020, as there are specific line items to report the different tax amounts.. Please contact us for more detailed instructions on filling out your payroll forms.
When are the deferred taxes due?
Employers that suspend collection of eligible employees' Social Security payroll taxes during the four-month suspension period must repay the deferred taxes to the IRS during the first four months of 2021, unless legislation is enacted to forgive the uncollected taxes. After April 30, 2021, penalties and interest will begin to accrue for tax amounts that have not been repaid. Employers will be responsible for paying all penalties and interest.
How does an employer collect the deferred taxes from an employee?
Companies that suspend collection of employees' payroll taxes would collect additional amounts from workers' paychecks from January 1 through April 30, 2021 to repay the tax obligation.
How does an employer collect the deferred taxes from an employee that no longer works for the company?
If an employee quits and there is no way to get the deferral back, the employer remains liable for the employee's share of Social Security taxes. The employer can make repayment arrangements with the employee, such as deducting the amount owed from the final paycheck. Otherwise, the employer would have to pay the balance owed. This is a significant risk that all employers should consider prior to allowing this deferral for their employees.
We hope this information will help employers decide what works best for their company. As an employee, please discuss this information with your employer to see what decision they have made regarding the deferral. We believe this information to be current as of September 4, 2020. The information in this article is subject to change at any time. If you have questions or would like to discuss how this impacts your business, please reach out to one of our Business Services professionals.