On August 8th, 2020, President Trump signed an executive memorandum deferring some payroll tax obligations in light of the COVID-19 pandemic. The IRS has since issued guidance on how the repayment of the deferral and Form W-2 reporting should be handled under the order by employers and employees.
Impact on Payroll Taxes
The executive memorandum defers the employee portion of Social Security taxes, which represents 6.2 percent of an individual’s paycheck. (Deferral of the employer portion of social security is addressed separately by Section 2302 of the CARES act.) This deferral is attributable to wages and compensation of eligible employees from September 1, 2020, through December 31, 2020. Social Security taxes are generally collected by employers from employees and transmitted to the government; therefore, employee paychecks could potentially be higher than usual during this period.
Eligible employees are those whose pre-tax wages and compensation total less than $4,000 biweekly or $104,000 annually. The limitations are prorated based on the frequency in which an employer pays wages. For example, in the event of a weekly payroll schedule, a $2,000 limit would be applicable. Per the order, employees must opt-in to this deferral.
Form W-2 Reporting Changes
The IRS has issued instructions for employers regarding when and where to report withheld Social Security taxes. More details on how these amounts should be reflected on Form W-2 and Form W-2c can be found here: Form W-2 Reporting of Employee Social Security Tax-Deferred under Notice 2020-65.
Repayment of the Deferral
Employers may withhold the amount of Social Security taxes deferred from their employees’ paychecks proportionally based on their wage schedule from January 1, 2021, through April 30, 2021. The amount withheld will be in addition to any Social Security taxes to be regularly withheld during that period.
Failure to repay by April 30, 2021, will result in accrued interest and penalties starting May 1, 2021. It’s important to note that if an employee whose social security taxes have been deferred is no longer working for the employer, the employer may ultimately be responsible for payment when these taxes are due.
Until then, business owners should educate their employees and create a plan to ensure they are prepared to pay the deferral back during 2021. If you need assistance handling employee deferrals for your business, enlist the help of a tax pro at Taxfyle.com