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IRS begins payroll tax deferral: Employers may suspend Social Security withholdings through Dec. 31

September 03, 2020 32081

Quick Summary:

Practice owners have the option to participate in a payroll tax deferral plan that will temporarily suspend the collection of Social Security taxes from employees' paychecks. The deferred taxes must be repaid between Jan.1 through April 31, 2020, which could result in smaller paychecks for employees.

A new payroll tax deferral plan that allows employers to suspend collection of Social Security payroll taxes is in effect through Dec. 31. The Trump administration ordered the Treasury Department to begin implementing the plan Sept. 1 to provide temporary assistance to workers who are facing financial burdens due to the pandemic.

How the tax deferral plan works

Typically, employees and employers each pay half of the total 12.4% Social Security tax due for each worker. Under the executive order, employers may choose to refrain from withholding the 6.2% from employees for Social Security but must still contribute their own portion for each worker. 

Participation is optional for employers and there are no penalties for noncompliance. The suspension applies to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year. The guidance does not clarify if employees can opt out if the employer chooses to suspend the tax withholding.

Employers are required to repay the deferred taxes beginning Jan. 1

Employers who suspend collection of eligible employees' Social Security payroll taxes during the four-month suspension period must repay the deferred taxes to the IRS from Jan. 1 through April 30, 2021. Employers can fulfill this obligation by collecting additional taxes from the workers’ paychecks early next year. Employers should explain to employees that this collection will result in smaller paychecks during the first four months of the year.

After April 30, 2021, penalties, interest and additions to tax will begin to accrue on employers for tax amounts that have not been repaid, according to the guidance.

The guidance also states that if an employer chooses to suspend withholdings and an employee leaves the company before repaying the deferred taxes, the employer is still liable, but the due date is just extended to the next year.

In California, it is not recommended that employers withhold unpaid taxes from an employee’s final paycheck, even with a signed agreement. If necessary, an employer can make a separate arrangement to collect the total applicable taxes from the former employee; otherwise, the employer would have to pay the balance owed.

Revised Form 941 available

The IRS released a draft version of a revised Form 941, the Employer's Quarterly Federal Tax Return, to take into account Social Security withholding that is deferred from Sept. 1 to Dec. 31.

"The key change is found on page 3, which asks for the 'Deferred amount of the employee share of Social Security tax included in line 13b,'" according to Society for Human Resource Management.

White House officials have discussed tax deferral forgiveness, however, doing so would require new legislation.

Until further clarity on the guidance is available, employers who receive requests from employees to withhold Social Security taxes or who wish to suspend withholdings under the deferral program should first speak with their tax expert or tax attorney.