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Employee Social Security Tax Deferral – an Employer Nightmare with More Questions than Answers


On August 8, 2020, the President issued an Executive Order (EO) to allow an employee to elect to defer their Social Security tax payment, on wages earned from September 1, 2020 through December 31, 2020, to a later date. Rightfully so, the EO lacked details on implementation, which would be up to the U.S. Treasury to determine. Late Friday afternoon on August 28, 2020, the IRS published Notice 2020-65, and while the notice does provide details, it is still lacking rules and guidance on many points.  Most employers, since March 27, 2020, have had the ability to defer the deposit of their share of Social Security taxes until the end of 2021 and 2022 as part of the CARES Act, so this EO basically provides a similar ability for employees for these last four months of this year.

First off, what we know is that there is a wage limit of $4,000 for a biweekly pay period ($2,000, if weekly or prorated for any other pay period). If an employee earns more than that amount, then the employee is not eligible to defer their social security taxes for that paycheck. Each pay period check stands on its own, so an employee who earns $5,000 in wages one pay period, then $3,000 on the next, would not be eligible on the first check, but would be on the next. The deferral, which is not a forgiveness of debt, applies to Social Security taxes only, which may also be called Old Age, Survivors and Disability Insurance (OASDI) tax, or together with Medicare tax as Federal Insurance Contributions Act (FICA) tax. Social Security tax is paid at the rate of 6.2% on taxable wages earned up to $137,700 for 2020 with the wage limit adjusted each year for inflation. I count 18 weeks starting on September 1, so that means the maximum amount that is able to be deferred by someone earning exactly $1,999.99, the maximum weekly wage, would be $4,464. It is also known that the tax amount that is deferred can be repaid as early as January 1, 2021, up to April 30, 2021. Interest and penalties will accrue on any balance of the tax owed starting May 1, 2021.

Now here is where it becomes clear as mud. Whose liability and duty will it be to collect and remit the tax due? The notice refers to the Affected Taxpayer as the employer, not the employee, so when you read this sentence “An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes,” it would appear that it will be the employer’s responsibility to collect the amount owed or they will face the penalties. The Notice goes on to read “If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.” What if the employee leaves the company? What if the employee does not earn enough wages? Does this mean that it is the employer who will pay interest and penalties should they not collect the deferred taxes? Will the deferred tax amount be reported on the W-2 form in a new box? Is it an opt-in for the employee? Can an employer opt-out from offering?

With all of these unanswered questions, I wouldn’t be surprised if employers do not implement the ability for employees to defer their taxes, especially if it becomes a liability to the employer. Not to mention that payroll systems will not have this functionality coded for several weeks if not months. I suppose, just as the PPP forgiveness details trickle out over the course of weeks and months, so will additional details on this program.

While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional as this appears to be a work in progress at the U.S. Treasury.

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