By Laura Detsch
On August 8, 2020, the President signed a memorandum with the subject line of: Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.
This memorandum’s intent was to provide temporary relief to support working Americans during these challenging times. During the period of September 1, 2020, through December 31, 2020, employers who choose to participate can defer the employee’s portion of just the Social Security tax. There are some provisos to comply with the memorandum, such as the fact that the wage or compensation has to be less than $4,000/bi-weekly per payroll. Plus, this deferred tax may need to be paid back if Congress does not vote to forgive it.
IRS Notice 2020-65 provides some additional clarifications to the memorandum. The big reveal in this notice was that this deferred tax is required to be paid back during the period of January 1, 2021, through April 30, 2021. What it doesn’t tell you is how to implement all this within your payroll or general ledger. As I pondered this, I put on my accountant hat and thought about how I would make this work.
Some questions came to mind.
- How can I populate the 941 and schedule B correctly? After all, this is a liability that needs to be recorded. The employer is still liable for the employee’s share of Social Security tax even if it isn’t deducted.
- How can I track this per employee so that they pay back what they need to?
- What if I have an employee leave before the full amount is paid back? You will need to work this out between you and the employee.
- What about the W-2: How will it populate correctly? Guidance has not been published on this as of September 9th. In all likelihood, the wage will be included in box 3 and the deferred tax in box 4, with a comment in box 14 of the deferred tax amount.
For now, as an employer, if you choose to implement this deferment on the employee’s share of Social Security tax (the 6.2%), here are some options that you may be able to utilize.
- In order to ensure that the total Social Security wage and tax are included on line 5a of the quarterly 941, process the payroll with the employee Social Security tax being deducted. This should also create the total liability amount to be entered on the Schedule B.
- Create a receivable in your general ledger (i.e. A/R – Employee’s Deferred SS tax). Also, create a “negative” deduction in the payroll system that will post to this G/L account. The amount of the “negative” deduction will be equal to the employee’s share of the social security tax which is deferred. In effect, this will defer the tax on the pay check, track the amount per employee with the year-to-date amount, track the amount the employer is liable for and the amount on line 24 of the 941 and the additional amount for line 13b of the 941 form.
- Note: You will need to monitor the employee’s pay. Remember, the amount cannot be $4,000/bi-weekly or more per payroll. ($2,000/week; $4,333/semi- monthly; or $8,667/monthly)
- Also, if the IRS wants the amount of deferred SS tax reported in box 14 of the W-2, you have the total amount.
- Move to the new year 2021. The IRS has issued you a Courtesy Reminder notice of the amount that needs to be paid. This amount will be paid through EFTPS as a “Notice” payment for the third or fourth quarter 2020. Do not include this payment with the current withheld taxes.
- The employee needs to pay this deferred tax in the period January 1, 2021 through April 30, 2021. You know the amount per employee that must be paid back. Using the deduction that you previously set up, deduct the amount. You can take the total amount and divide by the number of pays in the period, January 1, 2021, through April 30, 2021. The year-to-date amount, when completely paid back, should zero out the amount of year-to-date “negative” deduction.
- Note: Another option will be to take the amount deferred for the third quarter 2020 and divide by the number of payrolls in January 2021. This will provide the employer the amount that will need to be paid for the Q3 2020 period.
Then take the remaining amount and do the same for the Q4 2020 deferment.
- What if Congress elects to forgive this tax? If you have already deferred the employee portion, it will be a matter of an adjusting entry to your general ledger (DR the liability and CR the receivable).