IRS Confirms Employee Social Security Tax Deferral Is Optional

  • The IRS also clarified whether employers or employees have the controlling decision of whether to implement the relief
  • Additionally, the IRS clarified timing aspects of the deferral

Deferring the employee portion of Social Security tax is optional, the IRS confirmed Sept. 3, resolving ambiguity in this regard that had persisted since the announcement of this relief measure.

The implementation of this relief through application of Internal Revenue Code Section 7508A allowed the relief to be optional, an IRS representative said during the agency’s monthly payroll industry teleconference. Section 7508A is with regard to the Treasury Department’s authority to postpone specified deadlines in response to a federally declared disaster, such as the novel coronavirus outbreak.

Employer’s Choice

“Employers may, but are not required, to utilize the relief” with respect to deferring withholding and payment to the government of the employee portion of Social Security tax that otherwise would be withheld from compensation paid from Sept. 1 to Dec. 31, 2020, the IRS representative said.

Employers, and not employees, have the controlling choice of whether to implement deferrals of the employee portion of Social Security tax, the IRS representative said. While Notice 2020-65, which upon its release Aug. 28 specified some aspects of implementing employee Social Security tax deferrals, identified that employers required to withhold this tax are the affected taxpayers to which the notice provisions applied, the notice had not explicitly addressed whether employers or employees had the controlling choice of implementing this relief.

If an employee wants their portion of Social Security tax to be deferred but the employer does not want to implement the deferral, the employer would not be obligated to implement the deferral. An employer also can choose the degree to which its employees would be involved in the employer’s decision to implement deferrals of the employee portion of Social Security tax, the IRS representative said.

Clarification of Timing

The method for paying the deferred amount of Social Security tax due based on an employee’s compensation also was clarified by the representative.

While Notice 2020-65 referred to the need to withhold and pay the deferred employee portion of Social Security tax “ratably from wages and compensation paid between January 1, 2021 and April 30, 2021,” withholding and paying ratably in this regard does not refer to an amount of the tax not withheld and paid to the government during the four-month period from Sept. 1 to Dec. 31, 2020, needing to be withheld and paid at the same relative time in the following four-month period from Jan. 1 to April 30, 2021. For example, it is not the case that an amount of the tax not withheld and paid to the government with respect to compensation paid on Sept. 15 would need to in some form be withheld and paid as close as possible to Jan. 15.

Instead, withholding and paying ratably refers to determining, with respect to compensation paid to an employee from Sept. 1 to Dec. 31, 2020, the total amount of the employee portion of Social Security tax not withheld from that employee’s compensation and then, for the pay periods that are to occur from Jan. 1 to April 30, 2021, apportioning that total amount to be withheld in a proportional manner among the pay periods, the IRS representative said.

Other Issues

While Notice 2020-65 identified that an employer could make an arrangement with an employee to collect the deferred amount of the employee’s portion of Social Security tax in a manner other than ratably if necessary, the notice did not elaborate on what might occur if an employee separates from employment with the employer before the entirety of the deferred employee portion of Social Security tax was fully collected from the employee.

If such a separation occurs, the employer would be responsible for ensuring that the outstanding amount of the deferred employee portion of Social Security tax is nonetheless paid to the government, the IRS representative said. There is a possibility that this could cause a gross-up situation to occur with regard to amounts of tax paid by the employer on behalf of the employee, although the IRS is still examining this issue.

The IRS also identified that it acknowledges that the ability to defer the employee portion of Social Security tax affects data reporting for the 2020 Form W-2, Wage and Tax Statement, with regard to Box 3, Social Security Wages, and Box 4, Social Security Tax Withheld. The IRS is to issue guidance on how such reporting is to be affected by this type of coronavirus-related employment tax relief.

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