IRS Provides Instructions for Employers and Employees on the Deferral of Social Security Taxes

From McKonly & Asbury

Remember back on August 8th when President Trump issued his Presidential Memorandum stating that employees could defer their portion of Social Security taxes?  Well, the Internal Revenue Service has now posted instructions on how to account for this on Form W-2.

The memorandum that Trump signed allowed for employees to defer their 6.2 percent share of Social Security taxes from September 1, 2020, through December 31, 2020. The keyword here is DEFER. The deferred taxes would need to be repaid by either the employees or the employer by April 30, 2021.  Pretty much pay me now or pay me later.

There were certain stipulations around the payroll tax deferral too. For instance, it only pertains to employees with the equivalent of biweekly pre-tax income of less than $4,000. The purpose of the payroll tax deferral was to stimulate the economy during the coronavirus pandemic.

Most employers waited for more information about this payroll tax deferral which didn’t come until August 28th, just days before the start date of September 1st.

If you are an employer, you will want to check out this website.  In this publication, you will find instructions for both employees and employers regarding how the deferral is to be reported on Form W-2.

Basically, employers are to report in box 3 (Social Security wages) and box 7 (Social Security tips) of 2020 Form W-2 taxable wages for which payroll taxes were deferred.  Box 4 (Social Security withheld), should only include the amount of Social Security taxes actually withheld from the employee in 2020.  In other words, do not include the amount of deferred employee Social Security tax in Box 4.

Now for the fun part, the amount of Social Security tax that was deferred in 2020 (wasn’t reported in Box 4 on the 2020 W-2) and withheld from the employee in 2021 should be reported in Box 4 (Social Security tax withheld) on Form W-2c, Corrected Wage and Tax Statement using the tax year of 2020.  The reporting of total Railroad Retirement Tax Act (RRTA) compensation will be handled similar to taxable wages. Report RRTA compensation in Box 14 of 2020 Form W-2, but do not report the deferred Social Security tax amount. Likewise, when the Social Security tax is withheld in 2021, complete Form W-2c and include the deferred tax that was withheld in 2021 in Box 14. Employers should file Forms W-2c and W-3c with the SSA as soon as possible after all deferred Social Security tax deferrals have been withheld in 2021.

The IRS instructs employees, with one employer during 2020 where their Form W-2c for 2020 only shows corrected amounts in Box 4 or Box 14 (RRTA), that no further steps are required. If the employee had two or more employers during 2020, the IRS provides an explanation of how to determine whether the employee had excess Social Security tax on wages paid in 2020.

In a normal year, the tax filing deadline is April 15th, but 2020 has been anything but normal. The IRS does not mention anything about the tax filing deadline of April 15th and the fact that withholding of 2020 deferred Social Security tax in 2021 will not be completed until April 30, 2021. I suppose there will be more to come on this later. For now, be aware that if you elected to defer your portion of Social Security taxes from September to December 2020, the deferred tax will be withheld from your pay for the period of January to April 2021. Employers will be preparing, and employees will be receiving, Form W-2c once the deferred 2020 taxes have been withheld.

If you have any questions, please reach out to Kellye Leitholf, Supervisor with the ESG Group at [email protected] or 717-972-5796.