September 9, 2020 IRS attorneys respond to questions about the employee Social Security tax deferral On August 28, 2020, the IRS in Notice 2020-65 responded to a Presidential Memorandum (executive order) by providing initial guidance on the postponement of the withholding of the 6.2% employee share of Social Security tax for certain employees from September 1, 2020, to December 31, 2020. (See our executive summary.) In its monthly IRS payroll industry call on September 3, 2020, attorneys with the IRS Office of Chief Counsel for employee benefits, exempt organizations and employment tax were available to respond to questions concerning the Notice. While oral statements by IRS officials are not binding (Internal Revenue Manual, 32.3.1.9), their responses give us some insight into information that may be available in future guidance. Following are highlights of the questions and answers from this meeting. Table of Contents Question 1: Are employers required to delay employee Social Security tax withholding pursuant to the Notice? .. 2 Question 2: Does an employer have to delay employee Social Security tax withholding pursuant to the Notice if an employee requests it?............................................................................................................................................................................. 2 Question 3: Can the employer force all employees to participate, or does it have to solicit consents from employees?............................................................................................................................................................................. 2 Question 4: Is the employer liable for Social Security withholding tax that it does not recoup from employees in the period January 1, 2021, to April 30, 2022?............................................................................................................................................................................. 2 Question 5: Does the employer have to recoup the Social Security withholding form employees in 2021 in the same amounts in which they were deferred in 2020? (There are four months for the deferral, September 1, 2020, to December 31, 2020, and four months for the repayment (January 1, 2021, to April 30, 2021).............................................................................................................................................................................. 2 Question 6: If an employee earns on average more than $104,000 for 2020, are they still potentially eligible for the Social Security tax withholding postponement?............................................................................................................................................................................. 2 Question 7: If the employer pays the 2020 Social Security tax deferral on behalf of their employees (gross up) in 2021, is a 2020 Form W-2c required?............................................................................................................................................................................. 3 Question 8: How will the employee Social Security tax deferral and recoupment be reported on Form W-2?.............................................................................................................................................................................. 3 Question 9: How is the 2020 employee Social Security tax postponement reported on the 2020 Form 941?.............................................................................................................................................................................. 3 Question 10: Will the recoupment of the employee Social Security tax deferral be reported on the 2021 Form 941 and how will the recoupment be paid over to the IRS?............................................................................................................................................................................. 3 Question 1: Are employers required to delay employee Social Security tax withholding pursuant to the Notice? The Notice points to IRC Section 7508A as the authority for the postponement on the due date for employer withholding of the Social Security tax. Within the authority of IRC Section 7508A, the postponement of a taxpayer's deadline is not mandatory. Specifically, IRC Section 7508A provides that "the Secretary may specify a period of up to one year that MAY (emphasis added) be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed." Accordingly, under the Notice, the IRS has no authority to require that employers postpone the deadline for withholding Social Security taxes. Question 2: Does an employer have to delay employee Social Security tax withholding pursuant to the Notice if an employee requests it? No. The Notice designates employers as "affected taxpayers," thereby permitting employers to disregard their deadline; employees are not designated as "affected taxpayers" and, as a result, do not have permission to disregard the deadline without the employer's participation. Question 3: Can the employer force all employees to participate, or does it have to solicit consents from employees? The Notice gives employers flexibility in how they choose to implement the postponement of Social Security tax withholding. The Notice does not preclude forcing all employees to participate, nor does it preclude an employer from requiring that employees first furnish their consent. Question 4: Is the employer liable for Social Security withholding tax that it does not recoup from employees in the period January 1, 2021, to April 30, 2021? Yes. Employers are liable for Social Security taxes they do not withhold from employee wages and compensation that are under their control. (See IRC Section 6205.) Question 5: Does the employer have to recoup the Social Security withholding from employees in 2021 in the same amounts in which they were deferred in 2020? (There are four months for the deferral (September 1, 2020 to December 31, 2020) and four months for the repayment (January 1, 2021, to April 30, 2021). No. The Notice requires that employers recoup the Social Security tax withholding ratably from wages and compensation paid between January 1, 2021, and April 30, 2021; however, if this is not possible, the Notice gives employers the flexibility of using other arrangements to collect the Social Security taxes owed from employees. Question 6: If an employee earns on average more than $104,000 for 2020, are they still potentially eligible for the Social Security tax withholding postponement? Yes. The Notice states that the determination of applicable wages is made on a "pay period-by-pay period basis … irrespective of the amount of wages or compensation paid to the employee for other pay periods." Question 7: If the employer pays the 2020 Social Security tax deferral on behalf of their employees (gross up) in 2021, is a 2020 Form W-2c required? The IRS has not yet determined the Form W-2 or Form W-2c reporting requirements for the postponement and recoupment of Social Security tax withholding pursuant to the Notice. [Note that the rules have not changed for how income is treated and reported when an employer pays an employee's tax — it is reportable income until the IRS states otherwise.] Question 8: How will the employee Social Security tax deferral and recoupment be reported on Form W-2? The IRS has not yet determined the Form W-2 or Form W-2c reporting requirements for the postponement and recoupment of Social Security tax withholding pursuant to the Notice. [Note that the rules have not changed for how income is treated and reported when an employer pays an employee's tax — it is reportable income until the IRS states otherwise.] Question 9: How is the 2020 employee Social Security tax postponement reported on the 2020 Form 941? Concurrently with the issuance of the Notice, the IRS published the draft Form 941 for the 2020 third and fourth quarters showing that on line 13(b) the employer reports both the employer and employee Social Security tax deferral and the employee Social Security tax deferral is reported on line 24. Question 10: Will the recoupment of the employee Social Security tax deferral be reported on the 2021 Form 941 and how will the recoupment be paid over to the IRS? The recoupment will not be reported on the 2021 Form 941. Employer payment of the recoupment of the employee share of Social Security tax that is postponed in 2020 will be handled the same as the payment of the deferral of the employer portion of Social Security under the CARES Act. (See FAQ6 on the deferral of the employer portion of Social Security tax.) ———————————————
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