On August 8, 2020, Former President Donald Trump issued a memorandum allowing employers (including government agencies) to defer withholding and payment of the employee’s part of Social Security taxes, effective September 1, 2020, through December 31, 2020. This was an emergency declaration to give temporary relief to American workers during the COVID-19 pandemic.
This program is not connected to the CARES Act program that allows employers to defer deposit and payment of the employer’s share of Social Security taxes.
The IRS has issued several notices clarifying the process of repayment. The most recent notice, on January 19, 2021, included an extension of the repayment period through the end of 2021. The process is explained below.
How the Payroll Tax Cut Works
This declaration is a deferral, not a permanent cut in Social Security taxes for employees. The amounts deferred must be paid back by employees through withholding. The withholding payback period was originally through April 30, 2021, but the IRS has extended that period until the end of, 2021 (January 3, 2022). This means employees who deferred their Social Security taxes have a longer time to repay those taxes. Penalties, interest, and additions on unpaid balances won't apply until January 1, 2022.
The deferral is on the employee share of Social Security tax for wages as defined in section 3121(a) of the Internal Revenue Code (Social Security wages) paid to employees on a pay date beginning on September 1, 2020, and ending on December 31, 2020. The deferral is only allowed if the pay amount is less than $4,000 for a bi-weekly pay period or the equivalent for other pay periods.
Payroll taxes on pay over the $4,000 maximum can’t be deferred. The employee part of Social Security withholding is 6.2% of Social Security wages, which would mean a maximum deferral of $248 each pay period, for a bi-weekly pay period.
Let’s say an employee is paid $1,500 every two weeks. For the employee’s first pay period in September, based on this pay amount you would not withhold $93 from the employee for Social Security taxes. If the employee’s gross pay is $4,500 for the two week period, you can only defer $248, the maximum amount for $4,000 in wages.
An employee’s Social Security wages used to calculate Social Security tax may be different from their gross pay for that paycheck. For example, the employee may have reimbursements for business travel that you would normally be excluded from Social Security wages. You’ll need to figure the amount of Social Security wages to figure the Social Security tax, just as you would for a normal Social Security withholding calculation.
From a legal standpoint, no employer should make a decision about an employee's paycheck without an agreement prepared by an attorney and signed by the employee.
Unanswered Questions About the Trump Payroll Tax Cut
Speaking to The Balance via email, Teresa Ray, president and owner of The Payroll Department, Inc., said, “This is a very short-term benefit that could hinder the employee later when it’s time to repay the tax. What happens if the employee can’t pay it back? What if the employee leaves? For the employer, here’s the real hardship: The way that the executive order is written currently, the employer would be responsible for paying back the funds. If an employee asks for the deferral, it’s not clear if the employer can refuse the request. We would recommend written documentation for all involved to protect all parties.”
Even after the August 28 guidance, many other questions still remain unanswered, including:
- What if an employee is no longer working for your business next year? Will your business be liable to pay back the deferred amount?
- How would employees make the choice to have their Social Security tax payments deferred? Can employers add legal language to the employee’s acceptance of the deferral to protect the business from the liability to pay back the tax if the employee doesn’t pay?
- What if an employee works for several companies? Could they defer payroll taxes on wages from each employer?
- Would the increase in the employee’s take-home pay during the deferral period affect their liability for payment of garnishments, child support payments, and other wage-related retirement plan payments?
- How will these deferrals be reported to the IRS for quarterly tax reporting on Form 941 and annual tax reports on Form W-2?
Before you make the decision to defer employee Social Security withholding, talk to your attorney and your CPA. If you have a payroll service, check with them to see how they can help you. If you belong to a trade association or employer group, see if they have guidance.
How to Take the Deferrals in Your Payroll Process
If you decide to implement the deferrals, you’ll have to get buy-in from each employee first. That means having them agree in writing to the deferral. Your attorney should draft this agreement, and it should clearly state that the employee must pay back the deferred amounts and how and when that will be done.
As you pay employees during the rest of the year, you will have to keep track of the amounts deferred from each employee’s paycheck for the pay period. Include those amounts in a separate account from the other parts of FICA taxes—specifically employee and employer Medicare tax and your employer part of Social Security tax.
You will need to account for the deferrals on IRS Form 941, the employer’s quarterly payroll tax report. Since September is in the third quarter of 2020, you’ll have to do this on the October 31, 2020 report, and again for the fourth quarter of 2020, due January 31, 2021. Nothing has been announced yet by the IRS about changes to the form for this purpose.
Don’t forget to continue to make payroll tax deposits according to your usual schedule, either monthly or semi-weekly.