If you have employees, you must withhold their 6.2 percent share of the Social Security (OASDI) tax from their wages up to an annual wage ceiling ($137,700 for 2020).
You pay the money to the IRS along with your matching 6.2 percent employer share of the tax. The combined 12.4percent Social Security tax is one of the biggest tax burdens faced by businesses and their employees.
Relief for Employer Portion
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, a COVID-19 relief measure passed by Congress, allows employers to defer paying the employer 6.2 percent share of the Social Security tax from March27, 2020, through December 31, 2020.
Fifty percent of the deferred tax must then be paid by December 31, 2021, and the remaining 50 percent by December 31, 2022. This deferral is also available to self-employed taxpayers.
The CARES Act did not defer the employee portion of the Social Security tax. Thus, employers had to continue to withhold this 6.2 percent tax from their employees’ wages and pay it to the IRS. After failed attempts to get Congress to pass legislation to also defer the employee portion of the tax, the Trump administration issued an executive order to accomplish the deferral on its own authority.
The executive order directs the secretary of the Treasury to permit employers to defer withholding and payment of the employee share of Social Security taxes from September 1, 2020, through December 31, 2020, for employees earning below a threshold amount.
This is legal because the secretary of the Treasury has the power to postpone tax deadlines for up to one year in the event of a presidentially declared disaster, which the COVID-19 pandemic is.
The IRS has now issued much-anticipated guidance explaining how employers may implement the deferral. Unfortunately, the brief guidance fails to answer many practical questions.
Which Taxes Are Deferred?
The deferral applies only to the 6.2 percent employee portion of the Social Security tax that employers withhold from employee wages.
It does not apply to the 2.9 percent Medicare tax. Employers must continue to withhold the 1.45 percent employee portion of this tax and pay it to the IRS along with their matching 1.45 percent contribution. Employers must also continue to withhold their employees’ federal and state income taxes.
The new executive order employee deferral does not apply to self-employed taxpayers, although the self-employed can use the CARES Act employer deferral.
The employee Social Security tax deferral lasts from September 1, 2020, through December 31, 2020. But few, if any, employers were able to implement the deferral in early September due to the lateness of the IRS guidance. That said, employers may implement the deferral anytime before December 31, 2020.
The IRS has released a draft 2020 Form 941, Employer’s Quarterly Federal Tax Return, which includes a line (13b)for employers to report the deferred amount of Social Security tax.
Which Employees Qualify for the Deferral?
Employees qualify for the deferral if their pre-tax wages during any bi-weekly pay period are less than $4,000.Employees who are not paid on a bi-weekly basis qualify if their pay is equivalent to less than $4,000 bi-weekly.
This appears to mean that the deferral is also available for employees who are paid less than
- $2,000 weekly,
- $4,333 semi-monthly, or
- $8,667 monthly.
Each pay period is tested separately. An employee who earns one dollar more than these amounts during a pay period is not eligible for deferral during that period. But an employee who earns too much during one pay period can still qualify for the deferral if he or she earns less than the ceiling amount in a later pay period.
How much money are we talking about here? Not that much. For employees who earn the maximum $3,999 every two weeks, the deferred amount of Social Security tax is $124 per week. If the deferral is implemented for all 17weeks from September 1 through December 31, the maximum deferred Social Security tax is $2,108.
Is the Deferral Mandatory?
The IRS guidance is not entirely clear on whether the deferral is mandatory. But IRS officials have stated that the deferral is not mandatory.
This follows from IRC Section 7508A, which provides that tax filing and payment deadlines “may be disregarded” by employers where the secretary of the Treasury so directs in the event of a disaster. The statute does not require employers to disregard such deadlines.
Thus, employers are not obligated to implement the deferral even if their employees request it.
We note that the U.S. Senate, the U.S. House, the U.S. Supreme Court, Costco Wholesale Corp., United Parcel Service Inc., and FedEx Corp. are among those not offering this option to employees.
In an EY survey of 420employers, EY found that
- 203 were not going to offer the option;
- 209 were waiting for IRS guidance; and
- 8 were implementing the option.
It is unclear whether employers may discriminate between employees and defer Social Security taxes for some and not for others.
What Happens After the Deferral Period Ends?
The employee Social Security tax deferral ends on December 31, 2020. The IRS guidance provides that the deferred taxes must then be paid “ratably” from wages paid during January 1, 2021, through April 30, 2021.Affected employers must withhold and pay the deferred taxes from employee wages paid during this period.
Thus, from January 1, 2021, through April 30, 2021, affected employees who received the maximum deferral will have to pay a 12.4 percent Social Security tax instead of the normal 6.2 percent. This amounts to a 6.2 percent pay cut for four months.
The Trump administration’s ultimate goal is to have these deferred taxes forgiven.
But this can be accomplished only with congressional action.
If President Trump does not win reelection, the chances of this happening are likely nil. Even if he is reelected, the odds are probably not good. Democrats have expressed strong opposition to forgiving these taxes, and most Republicans have been lukewarm at best.
What If Employees Quit or Get Fired?
Any deferral of the employee portion of Social Security taxes poses one big problem for employers: what happens if the employee is not around to pay the taxes when the deferral period ends?
This could happen if the employee quits or is fired before April 30, 2021. It could also happen for employees hired on a seasonal or temporary basis. Moreover, continuing employees might not earn enough to pay the deferred taxes during the repayment period if, for example, they become disabled or take a leave of absence.
The IRS provides little helpful guidance here. Its notice says only that, if necessary, employers can “make arrangements to otherwise collect the total applicable taxes from the employee.” What form such “arrangements” could take is unclear. Presumably, employers could attempt to withhold the deferred tax from an employee’s final paycheck. But state wage laws could prevent employers from deducting the full amount due.
Some employment law experts have suggested that employers should get their employees to sign promissory notes for the amount of the deferred tax. But what if an ex-employee refuses to pay off the note? It’s not cost-effective to go to court to collect such a relatively small amount.
One thing the IRS guidance does make clear is that the deferred tax must be paid. If not, interest and penalties will begin to accrue on any unpaid deferred Social Security taxes starting May 1, 2021.
This could include the dreaded trust fund recovery penalty—a penalty equal to 100 percent of the unpaid trust fund taxes, such as employee withholding and FICA, plus interest. It can be assessed against corporate officers, partners, LLC members, employees, and other people responsible for collecting and depositing trust fund taxes.
The CARES Act’s employer Social Security tax deferral provided meaningful tax relief to employers by allowing them to defer their portion of Social Security taxes for up to two years.
In contrast, the Trump administration’s employee Social Security tax deferral, which lasts no more than four months, looks like an election-year gimmick. It’s simply not worth the trouble for most employers to participate.
One possible exception is if you’re the sole employee of your incorporated business, or if your spouse is the only employee of your business.
In this event, you can defer employee Social Security taxes with the assurance that the employee (you or your spouse) will be able to pay them back in 2021. This will put a bit more money in your or your spouse’s pocket over the holidays. But remember, you or your spouse will have to pay back the deferred tax early next year.