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Payroll Taxes

Fallout From the Payroll Tax Deferrals of 2020

  • Payroll taxes, otherwise known as Social Security taxes, were allowed to be deferred in 2020, to be paid later.
  • The 12.4% Social Security tax rate on wages is split evenly between the employer and the employee, up to a maximum wage base ($137,700 in 2020).
  • Employers were allowed to defer their share of the tax for much of the year; the deferral for employees was only effective from Sept. 1,  2020, through Dec. 31, 2020.
  • There are no payroll tax deferral options in play for 2021.

In March 2020, a provision of the Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allowed employers to defer the deposit and payment of the employer’s share of Social Security taxes from March 27, 2020, through Dec. 31, 2020. 

Later in 2020, President Trump, in an administrative move, declared  that starting Sept. 1, 2020, through the end of 2020, employers were allowed to stop withholding Social Security taxes from employees, effectively deferring the employee’s share of the tax for the last quarter of the year.

These two separate programs allow employers to pay the amounts deferred at different times in the future, depending on whether the deferral was for the employer portion of the tax, or the employee portion.

Employer Payroll Tax Deferral: What's Next

The CARES Act deferral time frame ended Dec. 31, 2020, and the liability to pay the taxes remains. All employers were allowed to take advantage of the deferral, but those that deferred paying the taxes did not have their Social Security tax liability waived. Reporting of the liability on quarterly Forms 941 still was required. The payment of the taxes accrued have only been delayed by this law.  

IRS guidance initially said that half the payment of the deferred employer-portion taxes  (of the total amount actually deferred for the quarter) would be due Dec. 31, 2021, with the other half due Dec. 31, 2022. This has changed. Now, regardless of amounts actually deferred, half of the total amount of the employer portion of the tax still owed for 2020 is due Jan. 3, 2022, with the other half due Jan. 3, 2023.  See IRS FAQs for more details on the continued obligations of employers that deferred their portion of the Social Security tax in 2020.

Employee Payroll Tax Deferral: Changing Options

The deferral of the employee portion of the Social Security tax was announced by President Trump in August 2020, with the plan for it to be effective from Sept. 1, 2020, until the end of the year.  

Almost immediately, many employers announced that they would not or could not make the deferral happen for their employees. The Treasury Department stated that employers would not be forced to defer withholding of employee wages to pay for the tax that would have become due by April 2021 anyway. President Trump indicated the employee portion could be legislated away in early 2021, making the payment of the taxes deferred moot.

There appeared to be too much to change in a short period of time for systems to pivot and put in place a complicated process that involved limiting the deferral to those employees whose biweekly pre-tax compensation generally was less than $4,000.  In addition, it appeared that employers would need to ensure that employees who had the tax deferred, paid the deferred amounts off by the end of April 2021, or would be liable for the taxes, penalties and interest.

Several federal agencies and some, but not many,  private employers stopped withholding on worker Social Security taxes through Dec. 31, 2020. These employers are to withhold, deposit and pay the deferred amounts from Jan. 1, 2021, to Jan. 3, 2022 (Dec. 31, 2021 falls on a public holiday). These amounts are to be withheld and paid in addition to normal Social Security taxes withheld for 2021 for 2021 wages.

Generally, employers that implemented the deferral of employee portion of the Social Security tax are to apportion additional withholding on the employee wages during 2021 so that by Jan. 3, 2022, the deferred tax amounts from 2020 have been completely eliminated.

So far for 2021, there is no indication that there will be other actions to defer Social Security taxes. But payroll professionals know that there always is a possibility this could happen again, in some form, as part of a future economic stimulus package. PYD