Update as of November 4, 2020:
The IRS has provided reporting instructions for employers who have begun deferring the employee portion of Social Security tax and/or the equivalent of Tier 1 Railroad Retirement Tax Act (RRTA) tax, following Trump’s Memorandum and under Notice 2020-65, the notice issued by the IRS and Treasury in late-August.
Social Security wages for which employers deferred withholding and payment of the employee’s Social Security tax should be reported with Social Security wages and/or social security tips, Boxes 3 and 7 on Form W-2. Compensation for which employers deferred withholding and payment of the employee Social Security tax equivalent of Tier 1 RRTA for this purpose should be reported with “Other,” Box 14 on Form W-2. For Social Security tax withheld, Form W-2, Box 4, employers must not include any amount of deferred employee Social Security tax not yet withheld. Likewise, for Tier 1 RRTA, do not include any amount of deferred Social Security tax equivalent not yet withheld.
Social Security tax deferred for an employee in 2020 and then withheld in 2021 (which was properly not reported on the 2020 Form W-2) must be reported on a corrected statement, Form W-2c. Enter “2020” in Box C, and an adjustment showing the deferred amounts from 2020 that were withheld in 2021 in Box 4. Tier 1 RRTA Social Security tax equivalent deferred in 2020 and then withheld in 2021 (which also was properly not reported on the 2020 Form W-2) must be reported on Form W-2c, with “2020” in Box C, and the adjustment in Box 14.
Once withholding of deferred amounts is complete, Forms W-2c must be filed along with the transmittal, Form W-3c, as soon as possible with the Social Security Administration (SSA). Employers must notify employees of related instructions. The IRS has provided employers with suggested instructions to furnish employees.
The IRS states the 2021 instructions for Forms W-2, W-3, W-2c, and W-3c will be published in January 2021, and should be consulted for further guidance.
This article was originally published on August 31, 2020:
Payroll Tax Deferral: Trump’s Executive Order Begins September 1, 2020
On August 8th, President Trump signed the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, which allows for the deferral of payment for certain employee payroll taxes. President Trump’s interest in payroll tax forgiveness, and even termination, isn’t new. But, in terms of using a payroll tax cut to ease the effects of COVID-19, it has faced bipartisan reluctance. Both parties are in favor of an immediate stimulus, which would expedite the benefits received by employees.
Payroll tax forgiveness generally requires approval from Congress, which, in this case, seems unlikely. So, while the memorandum stated that the Secretary of the Treasury “shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum,” the program ultimately calls for a payroll tax deferral, as opposed to forgiveness, of the employee portion of social security tax incurred.
Latest Program Guidance
Last Friday, the IRS and Treasury issued Notice 2020-65, which provides guidance on the payroll tax deferral program. Employers will need to decide whether to opt-in. The deferral applies only to the 6.4% employee portion of social security tax incurred between September 1, 2020, and December 31, 2020. The deferral is valid for bi-weekly, pre-tax compensation earned up to $4,000 ($104,000 annually); however, if payroll frequency is more or less than bi-weekly, the $4,000 amount is to be prorated. And, if an employee is paid compensation on a variable basis, it’s possible they could defer their payroll taxes and still earn more than $104,000 annually. The determination of applicable wages is to be made on a pay period-by-pay period basis.
Because the program calls for deferral of taxes withheld from the employee, amounts deferred constitute a loan that must be repaid. The employer and employee are both impacted by the decision to participate. The IRS and Treasury’s latest guidance indicates eligibility for employees wanting to participate is at the employer’s discretion. The employer is responsible for repaying the amounts deferred, by withholding the 2020 deferred tax from employees, during the period from January 1, 2021, to April 30, 2021. Interest, penalties, and “additions to tax” will begin accruing on May 1, 2021, for any unpaid balance.
Potential Issues to Consider
Employers should approach the program with caution, especially given the significant amount of guidance still needed from the IRS and Treasury Department. Given what we do know, there is no guarantee any deferred taxes will be forgiven, and employers will ultimately be responsible for unpaid amounts. The IRS guidance indicates, “If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee,” but details on such “arrangements” are unclear. And, for employees that terminate their employment ahead of repayment, employers will be saddled with the repayment obligation. Clarity is needed on the proper compliance procedures should an employer hold unpaid taxes in a bank account for an employee who subsequently leaves.
The U.S. Chamber of Commerce wrote a coalition letter to Congress and the Treasury on August 18th which stated, “Without congressional action to forgive this liability, [the executive order] threatens to impose serious hardships on employees who will face a large tax bill as a result of deferral.”
Delaying withholding now could help employees in the short-term, but not without significant effects on their level of income for the first four months in 2021. It appears employers are encouraged to double withhold from January 1, 2021, to April 30, 2021, and refrain from withholding from September 1, 2020, through year-end. Under current tax code, however, taxes imposed under section 3101 “shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid.” We expect additional guidance and clarity in the coming days and weeks.
ARB is dedicated to updating our clients and community as the legislative implications of the COVID-19 pandemic continue to unfold. We will keep you informed as more information becomes available. Contact us if you have questions on this information, and visit our COVID-19 Financial Resource and Tax Center for information on related tax and financial matters.
By Dan Doiron, CPA, CVA