Employee Social Security Tax Deferment
Would you like a little more money in your paycheck? As of September 1, 2020, employees now have the option to defer their Social Security taxes.
While that option may sound tempting at first, it needs to be accompanied by a careful review of the fine print. It’s you, the employer, who decides if the company participates, but it’s your employees who will be directly impacted by the decision.
Can anyone defer Social Security taxes?
No. The employee tax deferment option is for employees who make less than $4,000 bi-weekly or an equivalent amount for other pay periods. An employee's Social Security tax is 6.2% and is taxed on wages up to $137,700.
What is the difference between the employee deferment of taxes and the CARES Act portion of employer payroll tax deferment?
The difference is who pays the taxes. The CARES Act allowed companies to postpone payment of their portion of the Social Security tax. The postponement period is for wages from March 27 – December 31, 2020 and will need to be repaid by the end of 2022.
For employees, this latest option will defer their portion of Social Security taxes from September 2 – December 31, 2020, with the repayment due by April 30, 2021. Both programs are deferment of taxes, not forgiveness. The taxes will eventually have to be paid.
Why wouldn't a company allow for employee Social Security tax deferment?
Long story short, the deferment places a lot of added responsibility on the employer.
"If an employee quits unexpectedly and there's not a paycheck to deduct from, it would be extremely difficult for a company to try to collect,” says Rocelle Inman, senior director of accounting for Better Business Bureau Northwest + Pacific. “Companies should also understand that they are on the hook for those deferred taxes and can face penalties, interest and additional tax if not remitting the required taxes by April 30, 2021."
The company can arrange to collect the deferred amount from the employee. However, current guidelines don’t indicate what those arrangements should include.
What are the advantages and disadvantages for the employee?
An employee having extra money in their paycheck right now could be beneficial, especially if one wage earner is furloughed or laid off. The additional funds could help pay the rent, utilities, food, and other monthly household expenses.
The disadvantage is you are robbing Peter to pay Paul. The deferment means Social Security taxes are postponed, not forgiven. Employees will either pay the taxman now or by April 2021. Inman says, “It’s important to also remember that wages will still be subject to Social Security taxes next year, so employees will be repaying the deferred amount at the same time. Doubling up those payments will further reduce paycheck amounts in 2021.”
How does a company note the deferment on W-2s and 941 reports?
The IRS has released a draft of Form 941 for reporting the deferred wages. However, W-2 reporting hasn't been addressed as of September 2020.
Resources for Employee Social Security Tax Deferment.