Employee Social Security Tax Deferral
A Presidential Memorandum issued on August 8, 2020 directed the Treasury Secretary to use his authority to defer the withholding, deposit and payment of the employees’ portion of Social Security taxes from September 1 through December 31, 2020, as a way to put more money in the pockets of workers during the COVID-19 pandemic emergency. This is reflected in IRS Notice 2020-65. The deferral applies to the 6.2% tax on wages or compensation paid for a bi-weekly pay period of less than $4,000, or the equivalent threshold amount for other pay periods. Or said another way, generally employees with annual wages up to $104,000 were eligible for the deferral.
Any taxes deferred under Notice 2020-65 were to be withheld ratably from employee wages between Jan. 1, 2021, and April 30, 2021. However, the Consolidated Appropriations Act, 2021, signed into law Dec. 27, 2020 extended the period that the deferred taxes are withheld and paid ratably. The period is now for the entire year — from Jan. 1, 2021, through Dec. 31, 2021. Due to the year-end holiday, the deadline for employers to pay the deferred payroll taxes to the government is actually January 3, 2022.
So, deferred withholding increased employees’ take-home pay in September through December of 2020, but their 2021 pay checks will be smaller because their Social Security tax withholding will be increased during 2021 as a means of paying the deferred amounts in 2021.
The IRS Notice places the responsibility on the employer to make payment of the deferred payroll taxes. Otherwise, the employer may owe penalties, interest, and additional tax. This may create a problem when an employee no longer works for the same employer in 2021 as in 2020. Obviously, the employer can’t withhold the make-up tax since the worker has no wages from that employer. According to the IRS Notice, if necessary, the employer may make arrangements to otherwise collect the total deferred taxes from the employee, but it doesn’t specify what those arrangements should or could be.
Not officially addressed in the guidance was whether an employer must stop deferring withholding the Social Security tax from September 1 through the end of 2020. Treasury Secretary Mnuchin is reported to have said that he could not force employers to stop the withholding.