This article has been updated to reflect the Consolidated Appropriations Act’s deferral payment due date extension.
Like most employers, you probably had a lot of questions when you first heard about the executive order payroll tax deferral. But thanks to the IRS’s recently released guidance on the employee Social Security tax deferral, we have some answers.
If you haven’t heard the latest buzz on the employee Social Security tax deferral, we’ve got your rundown. To start, it’s not mandatory. Employees still owe the deferred money. And (the part you’ve been waiting for), employers are responsible for paying the postponed taxes.
The deferral period begins on September 1, 2020, so you have some decisions to make—fast. For more information on the employee Social Security tax deferral as it unfolds, read on.
Employee Social Security tax deferral: FAQs
The president issued four executive orders on August 8. One of them was the payroll tax deferral.
On August 28, the IRS released Notice 2020-65 to provide much-needed guidance on how exactly this employee Social Security tax deferral works.
And on December 27, 2020, the Consolidated Appropriations Act extended the payroll tax deferral repayment deadline.
Take a look at this Q&A segment to learn more.
What is it all about?
The payroll tax deferral executive order lets eligible employees temporarily defer the employee portion of Social Security tax. Keep in mind that this is a deferral, not a cut. Under the current orders, employees owe the taxes back at a later time.
Employees’ wages are subject to payroll and income tax. Payroll taxes include Social Security and Medicare taxes, which collectively are known as FICA tax. The payroll tax deferral only applies to Social Security tax.
The employee portion of Social Security tax is 6.2%. Employers pay a matching 6.2% for the employer portion of Social Security tax. As an employer, you’re responsible for withholding the employee’s portion from their wages and remitting it to the IRS.
Through the deferral, certain employees can temporarily stop paying the employee portion. If they do, you would hold off on withholding and remitting payment to the IRS.
Who is eligible?
Not all employees are eligible for this deferral. Employees whose pay is less than $4,000 biweekly (before taxes) can opt into the Social Security tax deferral. This amounts to $104,000 annually.
Don’t pay employees biweekly? Simply take the annual threshold and apply it to your pay frequency. For example, employees must earn less than $2,000 per week ($104,000 / 52 weeks) to be eligible.
What about employers?
Because this deferral only applies to the employee portion of Social Security tax, you might feel a little jilted. But if you think employers are getting the short end of the stick, think again.
Employers have been able to defer their SS tax payment since March 27, 2020 thanks to the CARES Act.
Under the CARES Act, employers can defer the employer Social Security tax due between March 27, 2020 – December 31, 2020. And, you have a longer repayment period than employees get under the executive orders deferral.
If you defer the employer portion of Social Security tax, your repayment period is:
- December 31, 2021 (50% of the deferred amount)
- December 31, 2022 (remainder)
So no, you are not included under the executive orders deferral. But, this is because you were already accounted for in earlier COVID-19 relief.
When is the deferral period?
The deferral period takes place between September 1, 2020 – December 31, 2020.
Employees can defer Social Security tax on wages paid between September 1, 2020 – December 31, 2020 if they meet the eligibility threshold.
When are deferred taxes due?
Deferred employee Social Security taxes are due by December 31, 2021. Before the Consolidated Appropriations Act, the deadline for repayment was April 30, 2021.
The deferred Social Security tax payment period is between January 1, 2021 – December 31, 2021.
If employees defer their Social Security tax liability, you are responsible for withholding the complete amount by a deadline of December 31, 2021. How?
Starting January 1, 2021, you can begin withholding the employee portion of Social Security tax as normal. You also need to withhold a portion of the deferred Social Security tax. Or, you can make another arrangement to collect the deferred taxes from the employee. Again, you now have until December 31, 2021 to withhold the deferred tax without penalties.
On January 1, 2022, interest, penalties, and other additions begin accruing on any unpaid deferred tax.
Do I have to defer my employees’ SS tax?
We get it. It’s a hassle to pause your employee Social Security tax withholding until January only to apply it back alongside regular withholding when the deferral period ends.
If you’d rather pass on deferring the employee portion of Social Security tax, here’s the good news: you can. The employee Social Security tax deferral is not mandatory for employers, so you can opt out.
If you do defer employees’ SS tax obligations, you are responsible for paying the deferred tax.
Can employees opt out of the deferral?
The IRS Notice 2020-65 doesn’t explicitly answer this question. Without further guidance, this may depend on what you let employees do.
Some employers who participate might enroll all employees while others may give employees a chance to opt out.
What is the point of this deferral?
In short, the deferral is like a penalty-free loan. Employees who take advantage of it get more money in their paycheck now but less money later.
What if an employee quits?
This is one of the top concerns employers have after reading the IRS’s guidance. If an employee quits before you can withhold the deferred taxes from their wages, what can you do? Aren’t employers the ones on the hook?
Although the IRS didn’t directly answer this, they did say that payroll tax withholding isn’t the only way to get the deferred money from employees.
Employers can “make [other] arrangements” to collect the total taxes from the employee, according to the IRS notice.
What does this mean? That part’s unclear. It could mean you can have employees write you a check before they quit. Or, it could mean you can withhold unpaid tax in one lump sum from an employee’s final paycheck.
More than likely, the IRS will release more information on this unknown.
Is there a chance the deferred tax will be forgiven?
Again, the executive orders only call for a deferral, not a cut. However, this could change if the government passes further legislation forgiving the deferred amount.
According to the White House Memorandum, the Secretary of the Treasury is going to look into legislation to forgive the deferred employee portion of the Social Security tax.
But, as we’ve all learned (cough, cough: slow-moving legislation), don’t bank on this. It’s far from guaranteed.
Time is ticking. Here’s a quick Q&A for skimmers
You’re busy. So, here’s a snapshot of the above FAQ section, made especially for skimmers:
- What is it all about? Employees can defer the employee portion of Social Security tax
- Who is eligible? Employees who earn under $4,000 gross biweekly
- What about employers? Employers are able to defer the employer Social Security tax portion under the CARES Act
- When is the deferral period? September 1, 2020 – December 31, 2020
- When are deferred taxes due? January 1, 2021 – December 31, 2021
- Do I have to defer my employees’ SS tax? No, it is not mandatory
- What is the point of this deferral? Employees get more money now
- What if an employee quits? Not directly answered, but you may be able to make other arrangements to collect the deferred taxes from employees
- Is there a chance the deferred tax will be forgiven? IF Congress passes legislation forgiving it