Background  

On August 8, 2020, a Presidential Memorandum was issued that allowed employers to defer withholding and payment of certain payroll tax obligations of their employees. To implement the Presidential Memorandum, the IRS issued Notice 2020-65 (“Notice”) on August 28, 2020, which gave employers the option to defer withholding of employee-side Social Security taxes from employee paychecks. The Notice allowed for the deferral of such withholding for wages paid from September 1, 2020 to December 31, 2020, if the wages were less than the amount of $4,000 per bi-weekly pay period (or a proportionate amount for other pay periods).  Any amounts deferred must be paid between January 1, 2021 and April 30, 2021, with interest and penalties beginning to accrue on May 1, 2021. The Notice did not provide information for employers on how to report the amounts of employee Social Security tax deferred.

Reporting Guidance for Employers

On October 29, 2020, the IRS issued guidance outlining how employers should report employee Social Security tax that was deferred pursuant to the Notice for W-2 purposes. The IRS's instructions provide that Form W-2, Wage and Tax Statement, must reflect only the amount of Social Security tax actually withheld from an employee’s 2020 wages. The employer must file with the IRS, and issue to the employee, a Form W-2c, Corrected Wage and Tax Statement when the employee's deferred 2020 Social Security tax is withheld from the employee’s pay in 2021. The specific instructions for reporting are as follows:

I.    Employer instructions. An employer that deferred an employee’s portion of Social Security tax:

a.  Should report total Social Security wages paid to the employee (including any wages for which withholding of Social Security tax was deferred) on Form W-2 in box 3 (Social Security wages) and/or box 7 (Social Security tips). 
b.  Should not include in box 4 (Social Security withheld) any Social Security tax that was not actually withheld. 
c.  Should enter tax year 2020 in box c of Form W-2c and adjust the amount previously reported on Form W-2, box 4 to include the 2020 deferred Social Security tax that was withheld from the employee's wages in 2021.

Paper Forms W-2c should be filed with the Social Security Administration, along with Form W-3c, Transmittal of Corrected Wage and Tax Statements, as soon as possible after the employer has finished withholding the employee’s deferred Social Security taxes. Copies of Forms W-2c should also be provided to employees. Employers should also consider drafting some type of communication with the employee in reference to the Employee Instructions below to accompany transmittal of Form W-2c in 2021, discussed further below.

II.     Employee instructions.  Employees who had two or more employers in 2020 will need to determine whether they paid excess Social Security tax in 2020 and, if so, to file a Form 1040-X, Amended U.S. Individual Income Tax Return. To determine whether they paid excess Social Security tax on wages or compensation paid in 2020, employees should total the amount of Social Security tax reported on their Form(s) W-2 and W-2c. If the amount in box 4 of the employee’s 2020 Form(s) W-2 and W-2c totals more than $8,537.40, then the employee should file Form 1040-X to claim a credit for the excess withheld Social Security tax.

Employees who had only one employer during 2020, and whose 2020 Form W-2c only shows a correction to box 4 to account for their employer’s 2021 withholding of the employee’s deferred 2020 Social Security tax, do not need to take any further steps.

Communication to Employees

Employers that deferred employee Social Security tax withholding may want to provide employees with some information about the deferral along with the Form W-2c in 2021. This communication should include, at a minimum: (i) a statement confirming that the employee elected to defer withholding of the employee portion of social security taxes for eligible periods between September 1, 2020 and December 31, 2020 pursuant to Notice 2020-65; (ii) a statement that the deferred taxes were withheld from the employee’s wages between the period of January 1, 2021 and April 30, 2021 in accordance with Notice 2020-65; (iii) an statement that the employee was issued a Form W-2c pursuant to IRS guidance issued on October 29, 2020; (iv) a statement that the IRS has indicated that if the employee had only one employer during 2020, no further action is required; and (v) a statement that the employee should consult with their individual tax advisor with respect to the form if they had more than one employer during 2020, or if they have other questions about the tax impact of the form.

Employers that decided to defer withholding employee Social Security taxes, or gave employees the option to opt-in to deferral, should take note of these new reporting requirements and plan accordingly.  If you have any questions regarding payroll tax deferral and the reporting process, please contact your Miles & Stockbridge attorney.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.