More information about deferral of the collection of the employee’s portion of Social Security tax (i.e., the 6.2% FICA portion withheld from an employee’s paycheck) is now available.
As previously reported, on August 8, 2020, President Trump issued a Presidential Memorandum allowing employers to defer the withholding and payment of the employee’s portion of Social Security tax. This is intended to provide financial relief during the pandemic.
On August 28, 2020, the IRS issued Notice 2020-65 to provide guidance on the deferral. Under the Notice, if an employer chooses to defer the collection and remittance of the employee’s portion of the payroll tax, the deferral of the tax is effective for the period of September 1 through December 31, 2020, and applies to employees earning pre-tax wages or compensation of less than $4,000 during a biweekly pay period or an equivalent amount with respect to other pay periods. To pay the amount of the employee Social Security tax deferred, the employer must ratably withhold and pay the deferred taxes between January 1 and April 30, 2021. You can read more about Notice 2020-65 in our August 31 Email Alert.
On October 29, 2020, the IRS released guidance on how to report the deferral. If your organization deferred the employee portion of Social Security tax:
- When reporting total Social Security wages paid to an employee on Form W-2, Wage and Tax Statement, include any wages for which you deferred withholding and payment of employee Social Security tax in box 3 (Social Security wages) or box 7 (Social Security tips), or both. You should not include in box 4 (Social Security tax withheld) any amount of deferred employee Social Security tax that has not been withheld.
- Report employee Social Security tax deferred in 2020 under Notice 2020-65 that is withheld in 2021 and not reported on the 2020 Form W-2 in box 4 (Social Security tax withheld) on Form W-2c, Corrected Wage and Tax Statement. On Form W-2c, enter tax year 2020 in box c and adjust the amount previously reported in box 4 (Social Security tax withheld) of Form W-2 to include the deferred amounts that were withheld in 2021.
The IRS stated that all Forms W-2c should be filed with the Social Security Administration (SSA), along with Form W-3c, Transmittal of Corrected Wage and Tax Statements, “as soon as possible after you have finished withholding the deferred amounts.” The IRS noted that these rules will be in the 2021 General Instructions for Forms W-2 and W-3, which will be published in January 2021.
In addition, the IRS said that employers should furnish Forms W-2c to employees. The guidance provided instructions for employees:
- Employees who had one employer during 2020 and whose 2020 Form W-2c only shows a correction to box 4 (or to box 14 for employees who pay Railroad Retirement Tax Act (RRTA) tax) to account for employee Social Security (or Tier 1 RRTA tax) that was deferred in 2020 and withheld in 2021 do not need to take any further steps.
- Employees who had two or more employers in 2020 and whose 2020 Form W-2c shows a correction to box 4 (or to box 14 for RRTA tax) to account for employee Social Security tax (or Tier 1 RRTA tax) that was deferred in 2020 and withheld in 2021 should use the amount of Social Security tax (or Tier 1 RRTA tax) withheld reported on the Form W-2c to determine whether they had excess Social Security tax (or Tier 1 RRTA tax) on wages (or compensation) paid in 2020.
- If the corrected amount in box 4 of the Form W-2c for 2020 causes the total amount of employee Social Security tax (or equivalent portion of the Tier 1 RRTA tax) withheld by all employers to exceed the maximum amount ($8,537.40) of payroll tax they owe, or increases an already existing excess amount of employee Social Security tax (or Tier 1 RRTA tax withheld), then employees should file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a credit for the excess Social Security tax (or Tier 1 RRTA tax) withheld. The instructions to line 10 of Schedule 3 in the 2020 Instructions for Form 1040, U.S. Individual Income Tax Return, and Form 1040-SR, U.S. Tax Return for Seniors, have more information on how to claim a credit for excess payroll taxes paid.