In August President Trump signed an Executive Order providing additional relief to Americans during COVID-19. The Executive Order provides an optional payroll tax deferral of the employee’s portion of social security withholdings from September 1, 2020 to December 31, 2020. Employers have been able to voluntarily defer their portion of the Social Security since April and now under the Executive Order, employees can request a deferral of their portion as well. While all the payroll processors and industry leaders are working with Treasury and the IRS to gain more details around this COVID-19 relief, here is what we know so far:
According to IRS Notice 2020-65 issued on August 28, 2020:
- The memorandum section of the Executive Order instructs Treasury to defer the withholding, deposit and payment of the employee’s portion of social security which is equal to 6.2% of gross wages and offers a payback term from January 1, 2021 through April 30, 2021. Interest will begin to accrue on May 1, 2021 for any unpaid amounts.
- The obligation to pay and track these amounts rests with the Employer even if the employee resigns or is no longer employed during the payback period.
- Applicable wages for which this tax can be deferred is subject to a threshold equal to $104,000 wages paid on an annual basis: $4,000 bi-weekly; $2,000 weekly; $4,333 semi-monthly; and $8,666 monthly.
For any wages in excess of these thresholds, the deferral is not available.
Practical Considerations
This is optional. Employers can offer and Employees can request this deferral. While the obligation to pay back this deferred tax rests with the Employer, there are steps that need to be taken on the part of the employer prior to not withholding this tax amount:
- Have an agreement in writing concerning the deferral of said withholding
- Indicate the pay back provisions for both the period between January 1, 2021 and April 30, 2021 AND if the employee leaves prior to that payback term, that it will be paid back in some form from the last paycheck. Be sure to consult with your labor attorney on this.
- Amounts will need to be calculated for each effected payroll period from September 1, through December 31, 2020. At that time, it is advised that Employers set up a “receivable from the employee” and an offsetting “Deferred Employee Social security” liability account in its underlying accounting records in order to track this.
- A draft Form 941 “Employer’s Quarterly Federal Tax Return” has been released by the IRS and is expected to be finalized prior to most third quarter filing deadlines of October 31, 2020 which shows the accounting of the said deferral.
Reach out to your payroll processor and your CPA if you have questions on how to apply the provisions of this specific relief and remember that we are all trying to learn as we go and communicate effectively in this ever-changing environment.
About A. Quarles CPA PLLC – A. Quarles CPA PLLC is a locally owned CPA firm in Winston-Salem that focuses on providing strategic accounting and tax solutions to small businesses and their owners. The firm offers bookkeeping, payroll, tax compliance and consulting, and strategic accounting management to its clients.