What to tell employees about the Social Security tax deferral

Well, the Executive Order allowing employers to defer withholding employees’ Social Security taxes has been operative for a few weeks. As far as we can tell, the only employer that is participating is the federal government. And it doesn’t seem to be going well.

Maximum uncertainty

Tax pros have advised private employers to not participate, for the reasons we’ve talked about here. Added to those reasons are these new wildcards:

• Two top Democratic senators have asked the Government Accountability Office, which provides nonpartisan research to Congress, whether the Aug. 8 EO is a “rule.” They’re not splitting hairs. Congress can overturn executive rules with a simple majority vote.
• Kevin Brady (R.–Texas), who sits on the House Ways and Means Committee, says he’ll introduce legislation to codify the deferral. Republicans, however, are in the minority in the House, so his legislation probably wouldn’t pass.
• Representatives from Virginia (among other states), which is home to many federal employees, are objecting to the fact that federal employees seem to have been dragooned into participating. They want to know why employees weren’t given a choice and what the procedure is for recovering those taxes from employees who terminate.
• Likewise, the union representing IRS employees wants to know whether there is an opt-out mechanism for federal employees who don’t want to participate.

Communicating to employees

You need to be able to communicate solid reasons to employees about your reluctance to participate. We’ve written about this here and here. It’s time to get more specific.

• Reason No. 1: It’s not a tax break. This is a tax deferral, not a tax cut or a tax holiday. It has become clear that whatever isn’t withheld now must be made up during the first four months of the next year—right when Christmas bills are rolling in.
• Reason No. 2: Do the math. If the prospect of facing a pile of Christmas bills with less pay isn’t enough to dampen employees’ enthusiasm, show them how it actually works out.

When deferrals began on Monday, it was widely presumed there were nine biweekly pay periods during which deferrals could occur, based on a biweekly pay date of Friday, Sept. 4.

Example. Harry is paid $1,000 in wages every biweekly pay period. His deferral is $62 ($1,000 × 6.2%). Total deferral for nine pay periods: $558.

Deferrals must be repaid ratably, beginning with the first pay period in January and ending on April 30. But there are only eight biweekly pay periods during this time.

Example. Harry has one less pay period to make up his deferral. So on top of his normal Social Security tax withholding, his employer must withhold an extra $69.50 ($588 ÷ 8).

Sample memo

You can adapt this to a memo/email/posting:

To: All Employees

From: [an insert name of HR manager or CFO]

Re: Social Security tax deferral

[Name of company] is aware of the Aug. 8 Executive Order, which allows employers to defer withholding your Social Security taxes for the remaining four months of the year. Employers’ participation in this program is voluntary. [Name of company] is declining to participate in this program.

This is not a tax cut. On Aug. 28, the IRS released guidance to employers on how to implement the deferral. The notice states the deferred taxes must be withheld in equal amounts from your paychecks, beginning Jan. 1, 2021, through April 30, 2021.

The math does not work out in your favor. While taxes may be deferred over the nine remaining paydays of this year, there will be one less payday next year for us to withhold the make-up amounts. If you deferred a total of $62 every payday, for example, you will need to pay back $69.50 every payday through April 30.

Withholding for the make-up amounts is in addition to Social Security taxes we withhold from your regular pay.

We understand an inequity may arise if Congress enacts a law to forgive the amounts deferred but does not extend similar forgiveness to employees whose employers continued to withhold Social Security taxes. Congressional action at this time, however, is a gamble.