Most people are familiar with the 6.2% Social Security tax that is withheld from each of their paychecks. During the Coronavirus pandemic, the Federal government was looking at many different ways to help Americans who were struggling financially. One method that was utilized was a payroll tax deferral that allowed employers to defer the withholding of the Social Security tax. Naturally, this change brought many questions. Is repayment of the deferred Social Security tax necessary, and was deferral mandatory in the first place? Keep reading as we give you all the details on the Social Security tax deferral, including how it works and how it might affect you.
What Is The Social Security Tax Deferral?
There are two parts to the tax deferral — the employee share of Social Security taxes and the employer share of those taxes. Both parts were affected by COVID relief provided in 2020. First, we will focus on the employee share of the tax deferral. A Presidential Memorandum, or Executive Order, was issued by President Donald Trump in August 2020 that provided for the deferral of certain Social Security taxes for eligible employees. The deferred amount was equal to the employee’s portion of the taxes — or 6.2% of applicable wages. This meant that the 6.2% payroll tax would not need to be withheld from an employee’s wages on earnings during the deferral period from September 1, 2020, through December 31, 2020. This only applied to individuals below a certain income level, and the tax withholding would still take place for those earning more than the limit. Note that the deferral also applied to Medicare taxes during this time period, so essentially all FICA taxes could be deferred.
When it comes to the employer portion, separate COVID relief in 2020 allowed employers to defer payment of these taxes to the IRS as well. This would allow employers to reduce their tax liability and spread those payments over two years. During the 2020 tax year, reducing these tax obligations provided a substantial financial benefit to many struggling businesses and self-employed individuals. The American Rescue Plan also extended the deferral of the employer portion of the Social Security tax through December 31, 2021. Remember, however, that these deferrals are not tax credits. The amount of tax that is owed to the Internal Revenue Service is the same, but the due date has simply been pushed into the future. However, the Cares Act did introduce separate tax credits that essentially cover the cost of some of these deferred taxes.
Do Employers Have To Defer Employees’ Social Security Tax?
Many people wondered whether businesses were required to defer the withholding of the Social Security payroll tax. The consensus is no. The tax deferral was not mandatory, and many employers chose not to defer the employee portion of Social Security tax. There are a couple of reasons for this. First, there was little IRS guidance associated with the Presidential Memorandum when it was first issued. This created a lot of confusion among employers about how the deferral was supposed to work and whether it was mandatory.
Next, employers were not given much advance notice of this deferral. It takes time and effort to update HR and payroll systems for a change like this, and many employers simply could not implement the stoppage of these payroll taxes in such a short timeframe.
Finally, there was no guarantee at the time the memo was issued that there would be forgiveness for these income tax obligations. In fact, we now know that repayment of any deferred taxes is required, and that may have left many employers and employees in a financial bind. Consider a couple of examples. Even though an employee’s paycheck may have been larger toward the end of 2020 due to this deferral, that same paycheck would take a hit in January 2021. Not only would the collection of the 6.2% tax begin again, but additional withholdings during each pay period in early 2021 would also be required to pay back the deferred taxes.
In addition, employers could get caught in a bad spot when an employee quits or is fired before repaying those tax payments. In that situation, the employer would still be required to remit the full amount of the deferred payments to the IRS before the due date. It would be the employer’s responsibility to recover this amount from an employee who was no longer with the company. This would create an undue burden on many employers, so they chose to simply not participate in deferring the payroll taxes. It is possible, and even likely that they would never recoup these deferred payroll taxes from those separated employees.
When Are Deferred Taxes Due?
So, when are the payments due for those who participated in the tax deferral? The due dates are different for the employee and employer. We will first take a look at due dates for the employee. First, remember that the taxes were deferred from September 1, 2020, through December 31, 2020. Those taxes that were deferred were then collected from January 1, 2021, through April 30, 2021. Essentially, employees were required to pay double their normal amount of Social Security tax during this time. The payment of the deferred taxes was originally due by May 1, 2021. Unless prior arrangements were made with the IRS, penalties and interest were scheduled to start accruing on May 1, 2021. However, that time period was extended, and the deferred taxes are now due on January 1, 2022.
Employers who decided not to pay their portion of the Social Security taxes during the deferral period will have longer to repay those amounts. When it comes to the employer portion, the repayment was spread over a couple of years. Half of the deferral was due on January 3, 2022. The other half will be due on January 3, 2023. An IRS notice went out to remind employers and self-employed individuals about the repayment schedule.
Employers and individuals can make payments for the employer Social Security tax that is due through the Electronic Federal Tax Payment System (EFTPS) or by credit card, debit card, check, or money order. When paying these taxes, make sure that they are paid separately from all other tax liabilities. This will ensure that they are properly collected and posted to the correct item, as some individuals or businesses may have payment due on other tax obligations as well.
Deferring Payments In Advance Of Credits
Remember that these deferrals were originally planned to be just that — deferrals. This means that the tax would still be due; however, the due date would be later than originally scheduled. As the COVID pandemic continued to take a toll on the economy and job market, additional action was taken by the Federal government. The Families First Coronavirus Response Act (FFCRA) granted some credits for employers outside of the tax deferral that was already in place.
Under the provisions of this Act, businesses could get up to a $10,000 tax credit per employee as an employee retention credit. This helped businesses retain employees during the height of the pandemic. So, the deferrals and credits ended up working together. The outcome was essentially this. Employers could initially defer their Social Security tax liability, even though they knew they would end up getting a credit for some portion of that liability. At tax time, the credits would be applied. The tax credits would help to essentially wipe out any taxes due as a result of the deferral. So, in short, the employer is required to pay a 6.2% Social Security tax on employee earnings. Under the provisions of the COVID relief efforts, employers could defer these payments to a later year, and then they could also end up getting credits that would cover the cost of these deferrals.
The Bottom Line
The Federal government took many steps during 2020 to help ease the financial strain of the COVID pandemic. Many individuals and businesses were put in financial hardship due to the pandemic. To help ease some of this strain, an Executive Order was put into place that allowed the deferral of Social Security tax payments. There were provisions that allowed for the deferral of both the employer and employee portion of the Social Security tax. Participation in the deferral was not mandatory, but repayment of the back taxes was mandatory for both employees and employers. The repayment schedule depends on whether you need to repay the employee portion or the employer portion of the tax.
Frequently Asked Questions
Will I have to pay back Social Security deferral?
Yes, you will owe the IRS the deferral amount. There was no forgiveness of these taxes. You were simply allowed to defer the amount due to a later date. For employees, you will be required to repay all of the deferred amounts by January 1, 2022. For employers, half of your deferred taxes will be due on January 3, 2022. The other half will be due on January 3, 2023. Failure to repay these taxes will result in penalties and interest accruing. You could get into big trouble with the IRS if the amounts are not repaid.
How do I pay back my payroll tax deferral?
There is nothing that you need to do in most cases to pay back your taxes. Your employer should automatically withhold the proper amounts from your paycheck to pay back the taxes that you owe. This should have already taken place, as payback of the deferrals for employees was due on January 1, 2022. You should have noticed during 2021 that the amount of your Social Security withholdings doubled during the first few months of the year. This was because your employer was withholding the deferred amounts from your check to repay the IRS.
What is the deferral limit?
The order that was put into place to allow the deferral did not place a limit on the amount of the deferral. The order stated that the deferral applied to the 6.2% Social Security on the first $137,700 of wages. At the time, that amount was equal to the Social Security tax limit. However, not all employees were eligible to participate. Only those who earned less than $4,000 on a bi-weekly basis were eligible for the deferral. This amount was calculated on a pro-rata basis for employees who were paid on different schedules. So, you must earn less than $2,000 weekly or $4,333 bi-monthly. If you earned more than these amounts, then you were not eligible to participate in the tax deferral.
It should also be noted that you may be eligible during one pay period but not the next. For instance, if you got paid weekly and your salary was $1,750, you could defer your taxes. If your salary was $2,100 during the next pay period due to overtime, then you could not defer your taxes during that pay period. The deferrals were all-or-nothing as there were no pro-rata calculations to determine how close you were to the limit. If you made $1 over the limit, then you could not defer any of your Social Security tax during that time period.
How do I defer Social Security tax?
At this time, you are not able to defer Social Security tax. These deferrals were only allowed from September 1, 2020, through December 31, 2020. In most cases, it was not up to the employee whether to participate. Your employer decided whether they would participate in the deferral program. If your employer participated, then there was nothing that you had to do. They would simply not deduct Social Security taxes from your gross pay. If you are self-employed, then you may have decided to defer paying your employer portion of the Social Security tax. Either way, repayment of the tax was mandatory. For employees, repayment should have already taken place since it was due on January 1, 2022. For employers, half of the amount due should have been paid by January 3, 2022, while the other half must be paid by January 3, 2023.