The Internal Revenue Service yesterday released a COVID Tax Tip highlighting guidance for employers who deferred payment of their employee’s 2020 Social Security tax. Initially described by legislators as a “payroll tax holiday,” the agency reminds participating employers that they still have to pay deferred employee Social Security tax by the new deadlines.

The IRS explains that employers were provided payroll-related tax relief in two parts last year:

• The Coronavirus, Aid, Relief and Economic Security Act allowed employers to defer payment of the employer's share of Social Security tax.
• IRS Notice 2020-65 allowed employers to defer withholding and payment of the employee's Social Security taxes on certain wages paid in calendar year 2020.

Notice 2020-65 was issued by the IRS following an August 8, 2020 Presidential Memorandum that “[directed] the Secretary of the Treasury (Secretary) to use his authority pursuant to section 7508A of the Internal Revenue Code (Code) to defer the withholding, deposit, and payment of certain payroll tax obligations” (Notice 2020-65, 1).

IRS COVID Tax Tip 2021-32 addresses three important points from the notice: which employee wages qualified for deferral, when payments for deferred employee withholding are due, and how employers can pay the deferred withholding.

Which employee wages qualified for deferral under Notice 2020-65?

Employers were permitted to defer Social Security tax withholding for employees making less than $4,000 every two weeks. While private employers could voluntarily participate in the payroll tax holiday, the IRS notes in the tax tip that “it was mandatory for federal employees and military service members.”

When are payments for deferred employee withholding due?

Deferred employee withholding should be paid ratably from January 1, 2021 to December 31, 2021, though the IRS notes that, due to the holidays, December 31 payments will be considered timely as long as they’re made by January 3, 2022. Importantly, employers who miss repayment deadlines could face penalties and interest.

How do employers make deferral payments for 2020 employee withholding?

The IRS recommends the Electronic Federal Tax Payment System for making deferred employee Social Security tax payments. The system accepts credit cards, debit cards, money orders, and checks, but there is an important caveat: You have to make deferral payment separate from other payroll tax payments, since “IRS systems won't recognize the payment if it is with other tax payments or sent as a deposit.”

That said, be on the lookout for the upcoming “deferral payment” option for EFTPS.

To make deferral payments, the IRS says “employers can visit EFTPS.gov, or call 800-555-4477 or 800-733-4829 for details.”

One final note: Business clients who elected to defer the employee Social Security withholding may want to remind affected employees that the previously deferred tax will come out of their pay in 2021, possibly resulting in lower-than-expected paychecks. 

Sources: COVID Tax Tip 2021-32