On August 28, 2020, additional guidance from the Department of Treasury and the Internal Revenue Service regarding the President’s Executive Order on the employee deferral of Social Security tax for 9/1/20 through 12/31/20 was issued. The guidance can be found for IR-2020-195 can be found here https://www.irs.gov/pub/irs-drop/n-20-65.pdf
The brief update stated that relief from the employee’s 6.2% Social Security tax would be available for any paycheck in which gross wages were under $4,000 in a bi-weekly period (or an equivalent amount of pay on a different pay cycle). The eligibility will be determined on a payroll by payroll basis, and the deferral will only be available if the gross payroll for the employee is under that threshold ($4,000 bi-weekly, $4,333 semi-monthly, $8,666 monthly, $2,000 weekly).
The deferral will essentially postpone the time for employers to withhold and pay the employee portion of Social Security tax until January 1 – April 30, 2021 (withheld ratably during that time period), or interest, penalties and additions to tax will begin to accrue on May 1, 2021. If necessary, the employers may make arrangements to otherwise collect the total deferred taxes from the employee.
The option is at the employer level as to whether or not to participate in the deferral option. However, it is not clear if employees have the option to elect out of the deferral at an individual level if an employer does choose to proceed with participating in the deferral at the company level. In order to protect the employer and employee and to ensure sure that all parties understand the implications of the deferral, we would recommend the following steps be taken by the employer should they opt to participate in the deferral:
- Make sure the employees understand it is expected that the deferred Social Security taxes will have to be paid back between Jan 1 – April 30, 2021.
- Have employees sign a contract agreeing to the additional withholding up to twice the normal amount of Social Security taxes in the period of Jan 1 – April 30, 2021.
- Include in the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to all of the deferred taxes being repaid.
- Have a plan in place to account for the repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he/she earned in 2020.
- Make sure your payroll team understands its obligations for adjusting paychecks to reflect the deferral and for adjusting paychecks in 2021 to repay the deferred amount.