Employee Social Security Tax Deferrals
On August 8, 2020, President Trump issued a memorandum to defer collection of the tax normally withheld from employees’ paychecks to fund Social Security. Namely is currently working on next steps to allow organizations to defer their employee Social Security taxes for pay dates from the day we release the behavior to December 31, 2021. All employees who fall within the wage threshold each pay period will have their Social Security taxes deferred if an organization chooses to enroll in the deferral process.
BACKGROUND
On August 8, 2020, President Trump issued a memorandum to defer collection of the tax normally withheld from employees’ paychecks to fund Social Security.
The deferral only applies to individuals who earn Social Security taxable wages “less than the threshold amount of $4,000 biweekly, or the equivalent threshold amount with respect to other pay periods”. This translates to the following amounts per pay period:
-
Weekly subject wages: $1,999.99
-
Biweekly subject wages: $3,999.99
-
Semimonthly subject wages: $4,333.32
-
Monthly subject wages: $8,666.65
Please note: the memorandum in its current state indicates that this is a deferral of employee taxes, not a tax cut of any kind.
NEXT STEPS
We are working on an enhancement that will allow companies to defer their employee Social Security taxes. You will be able to defer taxes from the day we release the enhancement until December 31, 2020.
All employees who fall within the wage threshold each pay period will have their Social Security taxes deferred if you choose to enroll in the deferral process. Participation in the deferral is completely optional, and companies only have the option of deferring the Social Security taxes of all eligible employees; you cannot select which employees will and will not have their taxes deferred.
Employee Risks
Payment Plan
Employees should speak with their Payroll administrator to discuss how they would like to pay the deferred funds back: either through a payment plan, or all at once. The deferred funds must be paid back via a post tax deduction from their paycheck. All deferrals are due back to the IRS by December 31, 2021, and due to Namely via wire by December 21, 2021.
Employer Risks
Penalties & Interest
As the memorandum currently stands, the employer is ultimately responsible for remitting the deferred taxes on time, and for any penalties and interest for late remittances of deferred employee Social Security taxes. This means that if employees are not able to pay back their deferred taxes, employers will need to pay back the IRS regardless of whether or not those funds have been collected from the employee.
If an employee leaves
If an employee leaves an organization and has deferred their social security taxes, repayment and any associated penalties and interest remain the employer's responsibility. This presents challenges - it may be difficult to track down an employee who has left your company, or the employee may have trouble paying the deferred tax.
Payment Plan
We recommend employers speak with their employees about a repayment plan well in advance of the repayment deadlines. As noted - repayment will need to be processed as a post-tax deduction from the employee's paycheck.
All deferrals are due back to the IRS by December 31, 2021, and due to Namely via wire by December 21, 2021. This means that payments may be due to the IRS before you recover the full deferment balance from your employees.
Employee Participation
You will be unable to enroll employees into the deferral program on an individual basis. If you sign up for the deferral, all employees who fall within the below per-pay period wage threshold will have their Social Security taxes deferred on a per-pay period basis:
-
Weekly subject wages: $1,999.99
-
Biweekly subject wages: $3,999.99
-
Semimonthly subject wages: $4,333.32
-
Monthly subject wages: $8,666.65
Other Considerations
Retroactive adjustments
Namely will not process retractive adjustments because Social Security taxes are due shortly after payroll processing, and we remit taxes right away. Because those funds have already been remitted to the IRS, we're unable to process retroactive adjustments for pay dates that have already passed.
Due date of payment
Although the due date for deferred Social Security taxes is December 31, 2021, funds must be wired to Namely by December 21, 2020, so that we can reconcile your reports and remit payment on time to avoid potential penalties and interest.
Form 941
The Federal Form 941 has been adjusted to include both employee and employer-deferred Social Security taxes.
Namely does not provide legal, accounting, or tax advice. Please consult with professional counsel for any tax, accounting, or legal questions.
FREQUENTLY ASKED QUESTIONS
Is this a tax break or a tax deferral?
This is a tax deferral, not a tax break. The memorandum, in its current form, states that any deferred Social Security taxes are due at a later date. On September 11, 2020, a bill was proposed in the House of Representatives that would alter the deferral period described above into a forgiveness period. However, please note, in order for the proposed tax forgiveness period to become law, it would first need to be passed in the House and the Senate and be signed by the President. Namely is actively monitoring for further updates.
If we are currently deferring our employer Social Security taxes, does this memorandum impact those deferrals?
No. If you are currently deferring your employer Social Security taxes as part of the CARES Act, this memorandum does not change that, and no further action is required.
Can Namely tell us which employees are eligible to have their Social Security taxes deferred?
No. While Namely can provide you with the employee salary and earnings data to assist in your decision-making process, we cannot determine whether or not an employee is actually eligible for the deferral. Please consult with professional counsel for any tax, accounting, or legal questions.
Are companies required to participate in the deferral?
No. Participation in the deferral is completely optional, and the decision to participate is up to the company, not individual employees.
When are deferred employee Social Security taxes due to Namely?
All deferred employee Social Security taxes are due via wire by December 21, 2020, so that we have time to review reporting and process payment timely to avoid potential penalties and interest.
Can the repayment of deferred taxes be automatically debited from our account instead of submitting a wire?
No. All deferred taxes owed must be submitted to Namely via wire using the Namely Treasury Bank Wire Form.
Will Namely reports be updated to include employee deferred taxes?
Yes. The Payroll Register Report, Cash Requirement Report, and Payroll Summary Report will be updated to include any deferred employee Social Security taxes.
Can employees sign up for the deferral individually?
No. If an organization signs up to defer employee Social Security taxes, all employees who fall within the per pay period wage threshold will have their Social Security taxes deferred.
If an employee falls within the wage threshold in one period, but makes more than the wage threshold in the next, will their Social Security taxes be deferred in both pay periods?
No. Employee Social Security taxes will only be deferred if they fall within the wage threshold for that particular pay period. For example, if an employee who is paid on a biweekly basis makes $3,000.00 in Social Security taxable wages in one pay period, and $5,000.00 in Social Security taxable wages in the next pay period, their employee Social Security taxes will only be deferred in the first pay period.
If our company has decided to not defer employee Social Security taxes, but one or more of our employees wants to defer their taxes, are we required to do so?
No. The IRS has confirmed that the decision to participate is optional and controlled by the employer. If an employee wants to defer their taxes but the employer has elected not to do so, the employer can not be forced to participate.