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What You Need to Know About the Employee Social Security Deferral

09-11-2020
Malka Trump, CPA

On August 8, the Presidential Memorandum allowing employers to defer the withholding of employee social security tax left many employers uncertain of its impact on their businesses and employees. Twenty days later, the U.S. Treasury issued much-anticipated guidance, providing employers with answers to many of their questions. Let’s look at what we currently know and what remains unclear.

What We Know from Treasury Guidance:

  1. Employers may opt into the employee social security deferral but are not required to do so.
  2. Employers who opt-in defer the withholding and payment of social security on employees whose wages are below $4,000 biweekly or equivalent amounts with respect to other pay periods for wages paid September 1 through December 31, 2020. Eligibility is determined on a pay period-by-pay period basis, regardless of annual totals.
  3. No deferral is available if an employee’s taxable wages are $4,000 or more for a biweekly pay period or the equivalent amount with respect to other pay periods.
  4. Employers are required to collect the deferred social security from their employees during the four-month period from January 1, 2021–April 30, 2021.
  5. If an employer cannot collect their employees’ social security tax during the four-month period (i.e. the employee is no longer employed), the employer is obligated to pay the tax. Interest and penalties begin to accrue on May 1, 2021.
  6. Treasury guidance states that employers may “make arrangements to otherwise collect” the deferred taxes from the employees, but the guidance is silent on how an employer may do so.

In addition, on September 3, the IRS orally clarified the following in its monthly phone call with the APA and other industry stakeholders:

  1. The decision to defer rests ultimately with the employer, not the employee. Thus, if an employer wants to defer for all employees, it may, even if the employee does not want to.
  2. The employer can choose the degree to which its employees would be involved in the decision to defer, implying that it may be a decision made by each employee if the employer chooses to structure it that way.
  3. The total amount deferred from September 1, 2020, to December 31, 2020, must be divided by the number of projected pay periods from January 1, 2021, to April 30, 2021, and withheld at a consistent rate.
  4. If necessary, and the employee agrees, the amounts may be withheld at a different rate in 2021.

What We Are Awaiting Further Guidance On:

  1. Are employers required to obtain an affirmative opt-in from employees before deferring their social security tax?
  2. How will this deferral impact Form W-2? A draft of the third quarter Form 941 has been released, reflecting the deferral, but the IRS has not yet provided information on changes to Form W-2.
  3. If an employer pays the employee portion of social security, must this be reported as income to the employee?

Additional guidance is expected from the Treasury, though the timing of such guidance is unknown. Some employers may decide on whether to opt-in based on what we know now, while others may hold off. Regardless of that decision, it would be wise for all employers to stay up to date on any changes to current law as it continues to develop.

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