Social Security Tax Deferral and Repayment Explained

On August 28, the IRS issued Notice 2020-65 to provide further clarification regarding a presidential memorandum that permits employers to defer the withholding and submission of the employee portion of Social Security taxes from September 1 through December 31, 2020. Employees who make less than $4,000 per biweekly period can qualify to have their Social Security taxes deferred under the memorandum; employers who defer the withholding of the employee portion of the taxes in 2020 must withhold the deferred amount from employee’s paychecks starting January 1 through April 30, 2021.

When filing the 2020 Form W-2, Wage and Tax Statement, employers need to report in Box 3 the total amount of taxable Social Security wages earned by the employee, but in Box 4, the employer need only report the amount of Social Security tax withheld from the employee’s paychecks in 2020. Box 3 should not include any portion of Social Security taxes that were deferred.

Once an employer withholds the entire amount of deferred Social Security tax from 2020 in 2021, they’ll issue a Form W-2c, Corrected Wage and Tax Statement, to the employee. On that form, employers will enter tax year 2020 in Box c and report in Box 4 (Social Security tax withheld) the Social Security taxes collected in 2020 and the Social Security taxes collected in 2021 for wages earned in 2020. Employers also need to file Form W-3c, Transmittal of Corrected Wage and Tax Statements, with the Social Security Administration. The IRS requests employers collect any deferred 2020 Social Security taxes as soon as possible.

Employers who elect to defer Social Security tax collection from employees’ 2020 paychecks will experience delays, as employees will need Form W-2c to complete their personal income tax returns. It’s recommended that employers advise employees to wait until they’ve received a W-2c to file their tax returns in order to avoid being assessed an underpayment penalty and having to wait 16 weeks for the IRS to process an individual amended tax return.

To illustrate what the Forms W-2 and W-2c will look like for employers who’ve elected to defer Social Security tax, we’ve prepared a brief example.

John Smith is paid $2,000 on a biweekly basis during 2020. In the month of December, John’s employer elects to defer the withholding of Social Security taxes in order to provide John’s family with extra money during the holidays; they defer $248 of Social Security taxes ($2,000 per paycheck times two paychecks times 6.2%). In this situation, John’s 2020 W-2 will appear as depicted in Illustration 1, with Box 3 containing all John’s taxable Social Security wages earned in 2020 and Box 4 reporting only the amount of Social Security taxes withheld during 2020 and not the deferred tax portion.

Illustration 1 – 2020 Form W-2

In 2021, John’s employer will withhold an additional $62 from each of his next four paychecks to pay back the 2020 deferred amount. By the end of February, John’s employer will be ready to issue him Form W-2c, reporting the full amount of Social Security taxes withheld for John’s 2020 wages earned (see Illustration 2 below). Box 3 reports the same wages as Form W-2, but Box 3 reports the total amount of 2020 Social Security taxes withheld in both 2020 and 2021.

Illustration 2 – Form W-2c

If you’d like additional information or want to have a discussion regarding the potential tax impact on your company of deferring Social Security tax, please contact Schneider Downs.