Deferring Employee Social Security Payroll Taxes

An employer’s decision to implement deferrals will depend on the needs of each business and their workers. Before an employer chooses to offer deferrals to its employees, employers should be aware of the following requirements and potential implications to employers under the Treasury Notice:

• Employers remain liable to collect from employees and pay to the IRS after December 31, 2020, the employee Social Security taxes deferred.
• Employers are required to withhold the total taxes deferred ratably from the employee’s wages for the four-month period from January 1 – April 30, 2021. If an employee is not employed with the employer for the full four-month period or the wage levels are lower than the wages for which taxes were deferred, the employer is still obligated to pay the total deferred taxes to the IRS.
• The employer is permitted to “make arrangements to otherwise collect” the total taxes due from the employee, but the Treasury Notice does not provide guidance on how an employer may do so. The employer may need to consult with legal counsel and tax advisors on how to properly collect the unpaid taxes from the employee.
• For any deferred taxes not paid to the IRS by April 30, 2021, the IRS will accrue interest, penalties and additions to tax beginning on May 1, 2021, and employers may be liable for these further amounts.

ADP strongly recommends that clients consult with their legal counsel and tax advisors regarding whether to allow employees to defer Social Security taxes pursuant to the Presidential Memorandum.

With the exception of ADP TotalSource clients, many ADP services have already implemented employee Social Security tax deferral capabilities while others are driving to implement solutions. More information about availability within your ADP product can be found by logging in to your ADP product. ADP has been working closely with the IRS to address open questions, and the IRS released its initial guidance at 5:00pm on August 28, 2020.

The IRS is aware that most employers will not implement the deferral by September 1 and recognizes that the deferral may be put into effect any time after September 1 on a prospective basis. To the extent an employer’s payroll for a pay date after September 1 has already run and taxes withheld, ADP cannot retroactively apply the employee Social Security tax deferral.

For ADP TotalSource clients, for further information, please visit this page.

No, the Presidential Memorandum only defers or delays the withholding and payment of employee Social Security taxes. Employer remain liable to collect from employees and pay taxes deferred under the Presidential Memorandum. While ADP cannot speculate on the eventual outcome, if the deferrals are to be forgiven, that could only occur through a legislative act passed by Congress.

Under the Treasury Notice, employers remain liable for employment taxes, whether they withheld such taxes or not. If Congress does not enact corresponding legislation to forgive the amounts deferred, the Treasury Notice requires employers to withhold the amounts deferred ratably from wages and compensation paid between January 1 and April 30, 2021.

The Treasury Notice allows an employer, if necessary, to “make arrangements to otherwise collect” the total deferred taxes from the employee. The Treasury Notice does not provide any further guidance on how an employer may otherwise collect the deferred taxes.

If an employer fails to withhold and pay the total deferred taxes by April 30, 2021, interest, penalties and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid deferred taxes.

No. Based on the guidance currently available, offering employees the deferral of withholding of Social Security taxes from eligible wages is optional for employers.

ADP strongly recommends that clients consult with their legal counsel and tax advisors on this issue.

No, it appears that the IRS will not require employers to notify the IRS of the employer’s participation decision.

The IRS has not yet issued guidance on reporting amounts deferred in 2020 and repaid in 2021 on Forms W-2. However, the DRAFT 941 for Q3 2020 released by the IRS does have a new line to report the deferred amount of employee share of Social Security tax.

Based on the latest guidance, it appears that individual employee elections are not required. However, because employees are expected to have different preferences as to deferral, employers should consider having employees affirmatively opt-in to have their Social Security taxes deferred before deferring.

The Presidential Memorandum and Treasury Notice do not address this question. Given the immediate effective date and number of employees that may need to consider the question and make an election, employers will likely use a variety of ways to reach employees and obtain elections for those who wish to defer.

As a best practice, electronic notices and consent mechanisms would be appropriate for employees to make their deferral elections, especially if employees customarily receive similar notices and make similar elections (e.g., annual benefits enrollments) electronically. Employers will need to maintain records of any elections.

ADP has prepared a sample form, available here, that employers can leverage to explain to employees their option to defer employee Social Security taxes and indicate to their employer whether they elect to defer.

While the Presidential Memorandum and Treasury Notice do not address this question, if an employee makes no election, the employer should consider withholding 2020 Social Security taxes as normal. ADP strongly recommends that clients consult with their legal counsel and tax advisors regarding whether to allow employees to defer Social Security taxes pursuant to the Presidential Memorandum.

The Treasury Notice is silent on this question, and nothing in the Presidential Memorandum or the Treasury Notice prohibits an employer from or requires an employer to defer employee Social Security for all of its employees without first obtaining affirmative opt-ins.

While ADP is prepared to support clients on implementing deferrals, employers should be aware of the following:

• Employees may have different perspectives as to deferrals, and some employees may not want to defer because they may be concerned with owing a large amount that will be withheld, in addition to the “normal” 2021 employee Social Security tax, beginning in January 2021.
• If an employee is not employed with the employer for January through April 2021 or the wage levels are lower than the wages for which taxes were deferred, the employer is still obligated to pay the total deferred taxes to the IRS.

Given the possible questions and concerns for both employers and employees, employers who wish to implement deferrals should offer employees the option to affirmatively opt-in before deferring their employee Social Security taxes.

The Treasury Notice is silent on this question. However, because employees are expected to have different preferences as to deferral, as a best practice, employers should permit employees to change their elections. Changes will take effect shortly after making an election (generally the next payroll processed after the election is recorded in the system) and will be prospective.

Because this is a payroll tax program, participation is determined by the employer. If the employer does not participate, the employee will not have an option to participate in the deferral program.

Employees should consider a number of factors when deciding whether or not to defer the Social Security taxes, including the following:

• Your employer may not offer the option.
  • It’s the employer’s choice whether to offer the deferral.
  • If your employer offers it, they may ask you whether you want to take the deferral.
• It is only a delay.
  • Any amounts that you don’t pay from September through December will be withhold from your pay starting in January.
• Your net pay could increase by 6.2% through December.
  • Social Security tax is 6.2% of your wages (up to $137,700 for 2020).
  • But in January, your wages could decrease by about 6.2% to repay the deferral (in addition to the other normal taxes and deductions that will apply).
  • It won’t be exactly 6.2% in most cases.
• Employers that offer the deferral will generally withhold the taxes deferred in even amounts from January 1 – April 30, 2021.
  • But if you change jobs, your employer may withhold the full amount deferred from your last check.
  • If so, this could take up almost half of your last paycheck (in addition to other taxes and deductions).
• You may not qualify for deferral for every paycheck.
  • It only applies if the amount your wages subject to Social Security taxes are less than $4,000 bi-weekly (or equivalent amounts for other pay schedules).
  • If you receive other payments such as commissions or bonus in the same pay period, the combined total may result in no deferral.
• There’s no phase-out for those with earnings close to the $4,000 limit.
  • Someone earning $3,999 in a biweekly pay period would qualify for deferral, but someone earning $4,000 would not.

Under the Treasury Notice, eligibility is based only on whether Social Security taxable wages for each pay period are under $4,000 for a biweekly pay period or an equivalent amount with respect to other pay periods. No annual wage limit applies.

The $4,000 biweekly limit is applied on a pay period by pay period basis. If the amount of Social Security taxable wages payable to an employee for one specific pay period is less than the corresponding threshold amount (e.g., $4,000 biweekly), the employee Social Security taxes for that pay period are eligible for deferral regardless of the amount of wages or compensation paid to the employee for any other pay period.

Equivalent amounts for other pay cycles are: Daily $400, Weekly $2,000, Semimonthly $4,333, Monthly $8,667.

The $137,770 taxable wage limit still applies. An employee whose biweekly wages subject to Social Security taxation are under $4,000, but who has already been paid wages subject to Social Security taxation in excess of $137,700 prior to September 1 with his or her current employer, is not eligible for deferral (since there is no tax to defer).

Yes, based on the Treasury Notice, ADP systems will automatically determine whether an employee’s pay on a given payroll is eligible for deferral.

Nothing. The Treasury Notice does not obligate employers to defer employee Social Security taxes. The IRS is aware that employers may implement the deferral after September, and recognizes that the deferral may be put into effect any time after September 1 on a prospective basis

No, an employer cannot adjust for prior payrolls to retroactively apply a deferral decision. No refunds are possible if employee Social Security taxes were withheld after September 1 and an employee later chooses to defer. Also, if an employee initially defers and later decides to revoke the deferral election, no additional tax will be collected retroactively for the period in which the deferral election was in effect.

Excluding ADP TotalSource clients, more information about availability within your ADP product can be found by logging in to your ADP product.

For ADP TotalSource clients, please visit this page for ADP TotalSource’s position on deferrals.

This is not known. The IRS will need to issue guidance on what kind of recordkeeping employers must do to track deferrals for its employees. ADP is working closely with the IRS to address this open question.

An employer that has deferred employee Social Security taxes in accordance with the Presidential Memorandum and Treasury Notice must withhold the total deferred taxes ratably from the employee’s wages over the four-month period of January 1 through April 30, 2021. For example, if an employee deferred a total of $800 in 2020, an employer that will pay eight payrolls between January 1 and April 30, 2021, will deduct $100 per pay from the employee to collect and pay the deferral. This withholding will be in addition to the normal Social Security tax due on 2021 wages paid during the same period, which may cause some questions and concerns.

Yes, if an employer fails to withhold or collect and pay the full amount of an employee’s deferred 2020 Social Security taxes, the employer remains liable to pay the amounts deferred regardless of the employer’s inability to collect the amounts from the employee. If an employer fails to fully pay the employee’s deferred Social Security taxes by April 30, 2021, the employer is liable for interest, penalties and additions to tax that begin to accrue on May 1, 2021 for any unpaid deferred taxes.

Under the Treasury Notice, the employer remains liable to pay the full amount of the employee’s deferred taxes to the IRS. The Treasury Notice permits an employer to “make arrangements to otherwise collect” the deferred taxes from the employee but does not provide further guidance on how an employer may otherwise collect the deferred taxes from the employee.

ADP strongly recommends that clients consult with their legal counsel and tax advisors to determine what arrangements are appropriate to otherwise collect any deferred taxes that employers do not collect ratably from wages paid from January 1 through April 30, 2021.