A Closer Look at the Employee Social Security Tax Deferment

Here is a quick guide to navigating this payroll tax deferral and reporting it for the 3rd quarter.

You may have heard about the option to defer your employees’ Social Security taxes. You may have also heard that this is optional for employers and these amounts will have to be reported to the IRS. Both of these points are correct, but there is more specific information that you need to know before your business begins deferring these taxes. 

Here is a quick guide to navigating this payroll tax deferral and reporting it for the 3rd quarter. 

What is this Payroll Action?

On August 28, 2020, President Trump announced this payroll deferment as another option for business owners that are still feeling the affects of the COVID-19 pandemic using an Executive Order. This payroll deferment can be applied to the employees’ share of  Social Security taxes withheld from their paychecks. 

It is important to note that under the CARES Act, employers are able to defer their own share of Social Security taxes as a form of tax relief amid the economic hardships caused by COVID-19. 

What Wages Are Applicable? 

Your employees’ wages are only applicable for deferral if they fall between September 1, 2020 and December 31, 2020. This is not mandatory, so employers can choose not to defer their employees’ Social Security taxes.

This deferral has another caveat, it is only available to employees with bi-weekly compensation of $4,000 or less. Employees don’t have the authority to require their employers to defer their share of taxes, however, some employers may offer this on a voluntary basis. 

What are the Pros and Cons?

The benefit of choosing to defer these Social Security tax payments is obvious, there is more money in the employees’ paycheck. However, there are drawbacks to this deferral that employers should seriously consider. 

For one, employers who opt into this deferral are liable for the deferred payments. This means that at a later time employers will have to account for the amount of taxes deferred. So, you may have to collect the deferred payments from your employees which can be difficult if they no longer work for you, have retired, or sadly, have passed away. 

In addition to the increased tax liabilities, there are also a series of extra administrative steps that will have to be taken to defer your employees’ Social Security taxes. Employers must get written consent from each employee. This may be a lot of extra work for your business considering this is a tax break that your employees will have to pay back in the future. 

How Should You Report Deferments? 

Employers must report the deferment of their employees’ Social Security taxes on Form 941. This is the Employer’s Quarterly Federal Tax Return. This form is being revised for the 3rd quarter of 2020, specifically to accommodate this tax deferral. 

According to the draft of this form, the following lines will refer to the tax deferment. 

Line 13b- Deferred amount of Social Security taxes 

Line 24- Deferred amount of the employee share of social security tax on Line 13b

If you choose to participate in the employee Social Security tax deferment, you will need to fill out both lines. If you choose not to, you won’t need to complete line 24. 

Looking for a solution for e-filing Form 941? You can e-file quickly and easily with TaxBandits! Our software leads you through the Form 941 line by line, so you can navigate the new data fields like a pro. 

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