Recently released IRS Notice 2021-11, implements the extension of the period for collecting from employees and depositing employee Social Security tax that was deferred in the last four months of 2020. IRS Notice 2020-65 (see earlier coverage) had specified that the employer “must withhold and pay the total [deferred 2020 taxes] . . . ratably from wages . . . paid between January 1, 2021, and April 30, 2021.” Many employers did not permit the deferral of such taxes. For those that did, the Consolidated Appropriations Act, which was signed into law December 27, 2020, modified Notice 2020-65 by extending the time period during which the employer must withhold and pay the 2020 deferred employee Social Security taxes. The period is now for the entire year − from Jan. 1, 2021, through Dec. 31, 2021.
The extension of time in which to collect the 2020 deferred employee Social Security taxes certainly spreads out the financial impact on affected employees’ paychecks across more pay periods in 2021, which is likely welcome relief to employees. However, it also increases the risk that the employer may not be able to collect all of the deferred taxes in 2021, since an employee could leave employment at any time during the year.
As explained in our earlier coverage, employers are not relieved of the obligation to deposit the deferred employee Social Security taxes. The employer remains 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 all of the deferred 2020 taxes in 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. Moreover, 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 and subjected to payroll taxes.
Notice 2021-11 does not clarify whether an employer that elected to defer the employee share of Social Security taxes can, in fact, impose a shorter period of time to collect the deferred taxes from the affected employees in 2021, in order to minimize the risk of uncollectibility because of employee terminations during the year. Notice 2021-11 simply states that the collection must occur during 2021 and that penalties, interest and additions to tax will now start to apply on Jan. 1, 2022, for any unpaid balances of 2020 deferred employee Social Security taxes. (Because December 31, 2021, is a legal holiday, deposits made by January 3, 2022, will be considered timely.)