IRS Releases Guidance on Employee Social Security Tax Deferral

In response to the executive order issued by the president on Aug. 8, 2020, the Treasury Department and the IRS have issued guidance on the deferral of the withholding, deposit and payment of certain employee payroll tax obligations on wages paid from Sept. 1, 2020, through Dec. 31, 2020.

Here are the highlights:

• The deferral of tax is optional for all employers.
• As stated earlier, this is a deferral of the withholding and deposit of the employee’s portion of Social Security on wages paid from Sept. 1, 2020, through Dec. 31, 2020.
• The payment of the deferred employee’s portion of the 6.2-percent Social Security Tax on applicable wages is postponed until the period beginning on Jan. 1, 2021, and ending on April 30, 2021.
  • But the guidance clarifies that any withholding done prior to Dec. 31, 2020, must be deposited under the normal schedule. This deferral of payment only applies if the amount is not withheld from the employee’s paycheck.
• The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies.
  • This is essentially a cliff, as the deferral is available if the biweekly, pre-tax wages are less than $4,000. If the wages are $4,000 or more, the deferral is not available (not even to the portion up to $4,000).
  • The determination of applicable wages is made on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period, and the relief provided in the guidance applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
• Guidance on paying the deferred taxes:
  • The employer must withhold and pay the total taxes that it has deferred ratably from wages and compensation paid between Jan. 1, 2021, and April 30, 2021. Interest, penalties and additions to tax will begin to accrue on May 1, 2021, on any unpaid applicable taxes.
  • If necessary, the affected employer can make arrangements to otherwise collect the total applicable taxes from the employee.
    • This may become applicable if the employee does not have enough wages from Jan. 1, 2021, to April 30, 2021, to cover the tax or if the employee is no longer employed.

While there are many remaining questions, such as whether the employer can elect on an employee-by-employee basis to withhold or if it is a blanket election, the ultimate withholding of the tax and the deposit of those taxes are the responsibility of the employer. We are advising caution for any employer looking to defer this tax, and look at other alternatives available by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

As always, if you have any questions, please call your local Hawkins Ash CPAs professional. We are here to help!

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