Deferral of Employee Social Security Tax

On 28th August 2020, Treasury Guidance made public the Deferral of Employee Social Security Tax. The promulgated Treasury Notice 2020-65 by the Internal Revenue Service (IRS) and Treasury Department allows employers to defer holding back and payment of Social Security tax for all workers with bi-weekly wages below $4,000 or other equal figures subject to wage payment from 1st September to 31st December 2020.

For employers considering whether to postpone employee Social Security Taxes, they should bear in mind the following tips given by the Treasury Notice:
• An employer has the liability for collecting and paying the full deferred amount as from next year, starting 1st January through 30th April.
• Employers should withhold the total deferred taxes from their worker’s wages starting from January to the end of April, next year.
• Perhaps the employee lays off the worker before the end payment period (30th April 2021); he/she is still liable to settle the total deferred taxes to the Internal Revenue Service.

In such cases, penalties, additions, and interests will start accruing immediately, starting from 1st May 2020.

If necessary, employers are allowed to liaise with their employees on how to collect the deferred taxes. However, the guidelines are not clear on how this can be worked out.

The Treasury Notice clearly highlights how the deferral effectively pushes forward the time for bosses to hold back and settle employee Social Security Taxes. Note that this withholding will include the usual Social Security tax due for January through to April 2021, which may cause some queries and concerns to arise.

For instance, let’s say a worker deferred about $800 for 2020. If the same person has a total of eight expected paychecks from 1st January to 30th April 2020, they will have to debit $100 per pay to settle the full amount deferred from the past year.

Focus on the Washington Regulatory; if the employee defaults payment past 31st April 2021, the due amount will be collected from the employer. When granting employees requests to defer, employers should call upon the employees to acknowledge that these deferred amounts will be debited from their wages from 1st January 2021.

Employers should also notify their employees of other necessary arrangements they can set up to collect the deferred amounts- this plan includes those workers who won’t be present through the whole period of January through April 2021.

All employees eligible for this agreement should be receiving a biweekly wage of not more than $4,000. If an employee’s bi-weekly taxable salary is above $4,000, they cannot qualify for deferral. Note that each payment gets factored separately to determine if an employee qualifies for deferral.

All in all, as described by the Treasury Notice secretary, Steven Mnuchin, employers are not obligated to defer their employees’ Social Security taxes. Neither the Presidential Memorandum nor the Treasury Notice clarifies whether employers who choose to wait should first secure their workers’ acknowledgment before deferring their Social Security Taxes.

An employer needs to know how many workers opt-in for this program since the current plan is simply a tax deferral that lasts just several months- most workers may opt not to defer their taxes.

Bosses who may want to provide Social Security taxes deferral should educate their employees about this program and set an affirmative election to determine who is in for it before progressing further.

Automatic Data Processing (ADP) has a sample worker notice already prepared for its clients. However, the Treasury Notice is still silent on how to conduct such elections and notices.

One of the best ways to regulate employee deferral elections should be through consent mechanisms and electronic notices, especially for those employees who occasionally receive such electronic notifications from their bosses and perform similar elections electronically, such as yearly benefits enrollments.

Even though further guidance is yet to come, employers should keep these elections’ records if they occur. We are waiting on the Internal Revenue Service to issue guidelines on the reporting requirements that come with this program.

Any deferred amount should be reported via Form 941, and maybe Form W-2. The Internal Revenue Service will require adequate details on the amounts deferred to reconcile and fetch these amounts from the employer if necessary.