H2R CPA Blog

Updated IRS Guidance on Employee Payroll Tax Deferral

by Phil Zlokas, CPA

The IRS recently held a payroll industry conference call which was predictably dominated by questions regarding the new deferral of the employee’s share of the Social Security tax, put in place on August 8, 2020, via executive order of the President. As an update to the article entitled “Treasury Issues Guidance on Employee Payroll Tax Deferral” written by Joseph M. Dickert, CPA, the IRS provided the following additional guidance during the call.

Deferral is Optional & Subject to Employer Discretion

In cases where an employee requests to have their portion of the Social Security tax deferred, the IRS emphasized that the deferral is optional and at the discretion of the employer. As such, although an employee may request to have the amount deferred, the employer is not required to do so.

Effect of Employer Paying Deferred Taxes (without withholding)

Employers are liable for the deferred employee taxes. To avoid penalties, interest, and additions to tax, the employer must withhold and remit the deferred taxes ratably between January 1, 2021 and April 30, 2021. Because the employer is liable, if an employee resigns or is terminated before the deferred amounts are withheld, the employer must make the payments of the employee’s deferred taxes. In these cases, the IRS noted that the portion of the deferred taxes paid by the employer would qualify as wages paid to that employee, making the amount taxable to the employee and tax deductible to the employer.

Form 941 Reporting

The IRS noted that when completing the Schedule B of Form 941, employers should continue to enter the total tax liability (including deferred amounts) for the period on the schedule.

The IRS has released a draft Form 941 in which the caption to Line 13b has been changed from “Deferred amount of the employer share of social security tax” to “Deferred amount of social security tax.” As a result of the change, the amount reported on Line 13b will now be the sum of the employer’s share of deferred Social Security tax and the employee’s share of the deferred Social Security tax, if applicable. This will allow the taxpayer to reconcile its total tax liability with amounts paid or deferred during the period.

Unanswered Questions

Questions relating to the deferral of the employee’s share of the Social Security tax still exist, and the IRS is working to provide additional guidance to help employers in applying the details of the executive order. We will continue to monitor future guidance and will provide updates as they arise. Please check back to the H2R CPA website for further information as it becomes available.

As always, if you need assistance with this matter, feel free to contact your H2R CPA liaison and they will be happy to assist you.