How to report deferred employee payroll taxes

On Oct. 29, the IRS posted guidance, available at www.irs.gov, about how to report the deferral of withholding, depositing, and paying of certain payroll tax obligations, as authorized by the Aug. 8, 2020, presidential memorandum directing Treasury to defer taxes under Sec. 7508A. The IRS has also updated Form 941, Employer’s Quarterly Federal Tax Return, to allow for reporting the deferred amount of employee Social Security tax.

In response to the memorandum, the IRS issued Notice 2020-65 on Aug. 28, 2020, allowing employers the option to defer the employee portion of Social Security tax from Sept. 1, 2020, through Dec. 31, 2020, for eligible employees who earn less than $4,000 per biweekly pay period (or the equivalent threshold amount with respect to other pay periods) on a pay-period-by-pay-period basis. To repay the deferred amount of the employee Social Security tax, the employer will ratably withhold the amount of Social Security tax deferred from the employees’ paychecks from Jan. 1, 2021, through April 30, 2021.

When reporting total Social Security wages paid to an employee on Form W-2, Wage and Tax Statement, employers who deferred the employee portion of Social Security tax should include any wages for which the employers deferred withholding and payment of employee Social Security tax in box 3, “Social Security Wages,” and/or box 7, “Social Security Tips.” Employers should not include in box 4, “Social Security Tax Withheld,” any amount of deferred employee Social Security tax that has not been withheld.

Employee Social Security tax deferred in 2020 under Notice 2020-65 that is withheld in 2021 and that was not reported on the 2020 Form W-2 should be reported in box 4, “Social Security Tax Withheld,” of Form W-2c, Corrected Wage and Tax Statement. On Form W-2c, employers should enter tax year 2020 in box c and adjust the amount previously reported in box 4 of the Form W-2 to include the deferred amounts that were withheld in 2021. All 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 deferred amounts. These rules will be in the 2021 General Instructions for Forms W-2 and W-3 (which will be published in January 2021). The IRS says that Forms W-2c should also be furnished to employees.

Railroad Retirement Tax Act (RRTA) compensation follows similar rules, but it is reported on box 14, “Other,” of the 2020 Form W-2. Employers should not include in box 14 any amount of deferred employee Tier 1 RRTA tax that has not been withheld.

Similar rules apply to recoup and report employee RRTA tax deferred in 2020 that is withheld in 2021 and not reported on the 2020 Form W-2. The amount recouped should be reported in box 14, “Other,” of Form W-2c for 2020.

Instructions for employees

Employees who had only one employer during 2020 and whose 2020 Form W-2c only shows a correction to box 4 (or to box 14 for employees who pay RRTA tax) to account for employee Social Security tax (or Tier 1 RRTA tax) that was deferred in 2020 and withheld in 2021 do not need to do anything. An employee who had two or more employers in 2020 and whose 2020 Form W-2c shows a correction to box 4 (or to box 14 for RRTA tax) to account for employee Social Security tax (or Tier 1 RRTA tax) that was deferred in 2020 and withheld in 2021 should use the amount of Social Security tax (or Tier 1 RRTA tax) withheld reported on the Form W-2c to determine whether the employee had excess Social Security tax (or Tier 1 RRTA tax) on wages (or compensation) paid in 2020.

If the corrected amount in box 4 of the Form W-2c for 2020 causes the total amount of employee Social Security tax (or equivalent portion of the Tier 1 RRTA tax) withheld by all the employee’s employers to exceed the maximum amount ($8,537.40) of payroll tax that the employee owes, or increases an already existing excess amount of employee Social Security tax (or Tier 1 RRTA tax withheld), then the employee should file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a credit for the excess Social Security tax (or Tier 1 RRTA tax) withheld. The instructions to line 10 of Schedule 3 in the 2020 Instructions for Form 1040, U.S. Individual Income Tax Return, and Form 1040-SR, U.S. Tax Return for Seniors, provide more information on how to claim a credit for excess payroll taxes paid.

Revised Form 941 and instructions

To report the tax deferral, the IRS has revised the 2020 Form 941, Employer’s Quarterly Federal Tax Return (available at www.irs.gov). Employers will report the deferred amount of Social Security tax on lines 13b and 24 of the form. The instructions for the form (available at www.irs.gov) have also been updated to explain these rules.