For employers who decided to defer the employee share of Social Security taxes on wages paid from September 1 to December 31, 2020, pursuant to President Trump’s August 8 presidential memorandum, the employer’s obligation to collect those deferred amounts from employees’ paychecks is fast approaching. Included among our previous posts discussing the deferral, which was voluntary, is a discussion of IRS Notice 2020-65. The notice specifies that the employer “must withhold and pay the total [deferred 2020 taxes] . . . ratably from wages . . . paid between January 1, 2021, and April 30, 2021” and further warns that “if necessary, the [employer] may make arrangements to otherwise collect the total [deferred taxes] from the employee.” (See earlier coverage.)
Employers are not relieved of the obligation to deposit the deferred employee Social Security taxes under section 3102 and, more specifically, remain liable for the payment of the deferred taxes, if the employer is unable to collect them from the employee. In other words, if the employer is unable to collect the deferred 2020 taxes in the first four months of 2021 from wages paid to the employee—because the employee leaves employment before or during that period—the employer must still deposit the deferred taxes or be exposed to late deposit and other penalties.
If the employer does not deduct the 2020 deferred Social Security taxes from other remuneration paid to the employee in 2021 or otherwise collect the amount from the employee before the end of 2021, the employer’s payment of the employee’s 2020 deferred Social Security taxes constitutes compensation to the employee in 2021, and that compensation must be reported on a 2021 Form W-2. Moreover, this compensation is subject to employment taxes and, if the employer is unable to collect the taxes on this amount in 2021 (which is likely since the employer was not able to collect the deferred Social Security taxes from the employee), the employer must calculate the applicable payroll taxes by grossing up the employee FICA taxes and income tax withholding under the procedures of Revenue Procedure 81-48 and Revenue Ruling 86-14. (Employers may also find the discussions in Program Manager Technical Advice (PMTA) 2018-015 and Field Service Advice 200022004 helpful.)
The requirement to treat the employer’s 2021 payment of the employee’s 2020 deferred Social Security taxes as wages subject to payroll taxation, in the event the 2020 deferred taxes are not collected from the employee, appears to have come as a surprise to some employers and payroll providers. In conference calls with the payroll industry, IRS Chief Counsel lawyers have stated that additional guidance will not be issued, because they believe the requirement is sufficiently addressed in IRS Publication 15-A in Section 7’s discussion of “Employee’s Portion of Taxes Paid by Employer.” [Section 7 is on page 22] Admittedly, the discussion in the publication is helpful, in that it explains how to figure the employee’s increased wages in a situation where the employee’s FICA taxes are paid by the employer. It fails, however, to highlight the additional financial impact on the employer when obligated to gross up the wages in order to comply with the statutory requirements to withhold FICA taxes and income taxes on wages because the example in the publication focuses on the employer’s voluntary payment of the employee’s FICA taxes during the current year, not with respect to a prior year. The obligation to gross-up the social security tax that the employer paid on behalf of the employee and report such amount on the 2021 Form W-2 is in addition to the requirement to amend the employee’s Form W-2c for 2020, as explained in IRS guidance, to report the deferred Social Security taxes that the employer paid in 2021 on behalf of the employee (see earlier coverage).
Because of the administrative burden of having to issue Forms W-2c for 2020 and the risks associated with not being able to collect the deferred taxes from employees in 2021, many employers decided not to defer the employees’ share of Social Security taxes. According to news reports, the largest employer to implement the deferral was likely the U.S. government. It is unclear how the U.S. government, as an employer, will handle the situation where it is unable to collect the deferred 2020 taxes from the employee’s wages or through some other arrangement with the employee before the end of 2021, but other employers should be aware of what existing IRS guidance would require.