On Aug. 28 2020, the Internal Revenue Service issued guidance on how to implement the optional employee-side Social Security tax deferral. If employers decide to opt in, the deferral allows them to postpone withholding and paying eligible employees’ Social Security taxes to the IRS for a period of time.
The deferral was authorized as part of the memorandum President Trump signed on Aug. 8 and is optional for employers and employees. It applies to Social Security taxable wages paid between Sept. 1 and Dec. 31, 2020, which are less than $4,000 biweekly on any pay period, or an equivalent amount for other pay schedules.
According to the IRS, employers who choose to opt in will subsequently be responsible for paying any previously deferred taxes if unpaid by the employee. Specifically, any deferred taxes must be withheld and paid ratably between Jan. 1 and April 30, 2021.
Risks for employers
The deferral is voluntary for all employers; however, there are risks to consider before making the decision to opt in. Employers who opt in are ultimately responsible for repaying the deferred amounts if the employee fails to repay. Amounts owed must be repaid by April 30, 2021, or interest, penalties and additions to these taxes will begin accruing on May 1, 2021.
Various situations could leave an employer responsible for repaying amounts employees owe. For example, an employee may terminate his or her employment prior to paying the full amount owed. Depending on the wages of an employee, this has the potential to be essentially an unsecured loan provided by the employer to the employee of up to approximately $2,000.
How it affects employees
Employee participation is also voluntary. Just because an employer is participating, that doesn’t mean its employees have to. Employees should also evaluate risks associated with opting in to the deferral. Come January, employees could find themselves unable to comfortably pay the additional tax expense. Unless Congress takes further action to forgive these deferrals, the impact of the deferral payment will be to effectively double an employee’s ordinary Social Security tax liabilities beginning January 2021. Thus, the employee’s take-home pay will be reduced by approximately 6.2% from what it otherwise would have been. This is because the employee will once again be subject to regular employee-side Social Security tax withholding plus the payment of the previously deferred employee-side Social Security tax.
Paycom is here for you
As the COVID-19 situation evolves, Paycom is here to help keep you informed on compliance-related issues. Companies should consult with their tax or legal advisers regarding their obligations as an employer.
The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.
