Employers can allow eligible employees to defer the payment of the employee portion of September 1 – December 31, 2020 Social Security Taxes into the first four months of 2021. Because this is purely a deferral (nothing is expected to be forgiven), the employee’s first four months of paychecks in 2021 will be smaller as repayment of the deferred taxes will be in addition to their normal share of January 1 – April 30, 2021 Social Security Taxes.
Participating employees will need to understand their liability for any unpaid taxes if they leave the company prior to May 1, 2021.
On August 8, 2020, in an effort to provide relief for those working during the coronavirus pandemic, President Donald Trump issued a memorandum allowing employers to defer the employee’s portion of Social Security Tax on wages of certain individuals.
Employer Considerations for Payroll Tax Deferral:
The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allows all employers, including tax-exempt organizations, to defer the deposit and payment of the employer’s share of Social Security Tax (6.2%) on wages paid between March 27, 2020 and December 31, 2020. This is separate and apart from the employee payroll tax deferral described above. With the CARES Act:
- The first 50% of the deferred taxes must be paid by December 31, 2021, while the second 50% must be paid by December 31, 2022.
- Report the deferred taxes on Line 13b of Form 941.
- Thanks to the PPP Flexibility Act enacted in June, receiving a PPP loan does not prevent you from deferring these taxes.
Employee Considerations for Payroll Tax Deferral:
The Executive Order, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, allows employees to defer their share of Social Security Tax (6.2%) on wages paid between September 1, 2020 and December 31, 2020.
- Eligible employees are those whose compensation is $4,000 or less on a biweekly basis.
- The deferred taxes must be paid back ratably by the employee between January 1, 2021 and April 30, 2021.
- Penalties and interest will begin to accrue on May 1, 2021 for any unpaid taxes.
Participation in this program is decided at the Employer level. Therefore, employers are not required to defer their employees’ Social Security taxes.
Make sure that any participating employees understand that the taxes are only delayed and not forgiven. The purpose of the deferral is more of a short-term loan, and their paychecks will be smaller for the first four months of 2021.
There is currently no direct guidance from the IRS on what to do if an employee leaves before they’ve repaid the taxes, but an employer “may make arrangements to otherwise collect the total Applicable Taxes from the employee” which could mean withholding the balance from their final paycheck.
The President and certain lawmakers have advocated full forgiveness of the taxes, but as of the date of this article, they must be paid back in 2021.
The President is utilizing IRC Section 7508A to postpone the collection of the tax during a national disaster. It is important to note that 7508A allows for the deferral but not the forgiveness of the tax. Therefore, it would take an act of Congress to grant forgiveness which does not look likely at this time.
If you are considering deferring employer or employee payroll taxes, we recommend reaching out to your tax advisor at Briggs & Veselka who can recommend the best choice for your organization. Contact us here.
Author: Kaylee Prescott, CPA, Tax Senior Manager
According to the Committee on Ways and Means, on August 28, Treasury Department released guidance providing additional detail for the implementation of this Executive Order. The IRS guidance is available here.