UPDATE: Treasury Department and IRS Issue Guidance on Deferring Certain Employee Social Security Tax Withholding

November 2, 2020

The IRS recently posted guidance on how to report the deferral of withholding, depositing and paying of certain payroll tax obligations, as authorized by the Aug. 8, 2020 Presidential Memorandum.

In response to the Presidential Memorandum, the Treasury Department and the IRS issued Notice 2020-65, which makes relief available for employers and generally applies to wages paid starting Sept. 1, 2020 through Dec. 31, 2020. Employers have the option to defer the employee portion of the OASDI (Old Age, Survivors and Disability) of FICA taxes - the 6.2 percent tax on employment wages - for eligible employees who earn less than $4,000 per biweekly pay period. Employees with variable pay could be eligible for deferral in one payroll period but not eligible in the next period. To pay the deferred amount of the employee portion of Social Security tax, the employer will ratably withhold the amount of Social Security tax deferred from the employees' paychecks from Jan. 1, 2021 through April 30, 2021. The deferral is not mandatory and there is no penalty to employers for not participating.

In the new guidance, the IRS states that employers that deferred the employee portion of Social Security tax should include any wages for which they deferred withholding and payment of employee Social Security tax in box 3 (Social security wages) and/or box 7 (Social security tips) when reporting total Social Security wages paid to an employee on Form W-2, Wage and Tax Statement. However, they should not include in box 4 (Social security tax withheld) any amount of deferred employee Social Security tax that has not been withheld.

The guidance also states that 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 should be reported in box 4 (Social security tax withheld) on Form W-2c, Corrected Wage and Tax Statement. On Form W-2c, employers should enter tax year 2020 in box c and adjust the amount previously reported in box 4 of the Form W-2 to include the deferred amounts that were withheld in 2021. All Forms W-2c should be filed with SSA, along with Form W-3c, Transmittal of Corrected Wage and Tax Statements, as soon as possible after employers have finished withholding the deferred amounts. 2021 General Instructions for Forms W-2 and W-3 will be published in January 2021 with more information about completing and filing Forms W-2c and Forms W-3c.

The IRS has also updated Form 941, Employer’s Quarterly Federal Tax Return, to allow for reporting the deferred amount.

For more information, including how to report total Railroad Retirement Tax Act (RRTA) compensation under Notice 2020-65 and instructions for employees, visit the IRS website.