Published September 9, 2020

Pay It Now or Pay It Later…What You Need to Know about Deferral of Employee Social Security Tax

On August 28, 2020, as part of the ongoing response to the COVID-19 pandemic, the IRS and U.S. Treasury Department issued Notice 2020-65 giving employers the option to defer the withholding and payment of employee Social Security tax on wages paid during pay periods beginning September 1, 2020, through December 31, 2020. This notice clarifies that only those employees whose wages are less than $4,000 biweekly, or equivalent amounts for differing pay periods, are eligible for the deferral. If you have employees that meet that qualification, here are some important points to consider as an employer deciding whether to opt-in or out.

The deferral is optional, to be chosen by the employer.

The notice simply provides the option for employers to defer Social Security taxes. If an employer decides against implementing the tax deferral, they are not obligated to defer taxes. This is important to note, as employers—not employees—have control over whether they want to opt-in or opt-out.

When are the deferred Social Security taxes due?

The employer is required to withhold and pay each employee’s total deferred taxes ratably January 1, 2021, through April 30, 2021. The deferred tax withholding will be paid on top of the requisite Social Security tax due for 2021 wages paid during the same period. It is critical for an employer to consider that, as of May 1, 2021, any unpaid deferred taxes will begin to accrue interest, penalties, and additions to tax, for which the employer would be liable. An additional matter to consider is that employees may not be employed when it is time to pay back the amount deferred. According to the notice, employers may ‘make arrangements to otherwise collect’ these taxes, but additional guidance will be needed on those specifics. Additionally, such efforts may be an additional financial and administrative burden.

One additional consideration–employees may not understand the fact that the deferral that helps them at the end of 2020 will actually reduce their paycheck for the first four months of 2021. Because the deferral is the choice of the employer, but the tax is ultimately the burden of the employee, communication about the decision and its impact is paramount.

More guidance that answers the numerous lingering questions is expected. For future updates and up-to-date COVID-19 information, visit PYA’s COVID-19 hub.

Should you have any questions or additional concerns, contact a PYA executive below at (800) 270-9629.

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