IRS Instructions for Form W-2 Reporting of Deferral and Repayment of Social Security Tax


Emptech's founder, Jeff Aleixo


Jeffrey Aleixo

IRS Reporting Deferred Social Security Tax

In late October, the IRS posted guidance on reporting the deferral of withholding, depositing, and paying of certain payroll tax obligations, as authorized by presidential memorandum directing Treasury to defer taxes under Notice 2020-65. In conjunction, the IRS also announced the updated Form 941, Employer’s Quarterly Federal Tax Return, to reflect any deferrals.

Background of Social Security Tax Deferral

Presidential Memorandum was issued on August 8, 2020, directing the Secretary of the Treasury to use his authority under IRC Section 7508A to defer the withholding, deposit, and payment of certain payroll tax obligations in light of the COVID-19 emergency. Subsequently, the IRS issued Notice 2020-65 on August 28, 2020. According to the Notice, employers have the option to defer the employee portion of Social Security tax from September 1, 2020, through December 31, 2020. This applies to eligible employees who earn less than $4,000 per biweekly pay period or the equivalent threshold amount for other pay periods, determined on a pay period-by-pay period basis. To pay the deferred amount of the employee portion of Social Security tax, the employer ratably withholds the amount of Social Security tax deferred from the employees’ paychecks from January 1, 2021, through April 30, 2021.

Find out how to effectively and accurately handle tax responsibilities, remain compliant with tax requirements, and prevent costly mistakes with this comprehensive guide.

Reporting Social Security Tax Deferral

When reporting total Social Security wages paid to an employee on Form W-2, employers should include any wages for which they deferred withholding and payment of employee Social Security tax in box 3, Social Security Wages, or box 7, Social Security Tips. At the same time, employers have to use box 4, Social Security Tax Withheld, only to show the Social Security taxes that were actually withheld from the employee’s wages and not the Social Security tax withholding that was deferred.

Form W-2c

Employee Social Security tax deferred under Notice 2020-65 that is withheld in 2021 and 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. Employers should use Form W-2c to enter the tax year 2020 in box C and adjust the amount previously reported in box 4 of Form W-2 to include the deferred amounts that were withheld in 2021.

Forms W-2c have to 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 included in the 2021 General Instructions for Forms W-2 and W-3. Forms W-2c should also be furnished to employees.

Railroad Retirement Tax Act

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

Similar rules apply to 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.

Suggested Instructions for Employees Receiving Form W-2c

If employees had only one employer during 2020 and their Form W-2c for 2020 only shows a correction to box 4 to account for Social Security tax that was deferred in 2020 and withheld in 2021, no further steps are required. However, if employees had two or more employers in 2020, they should use the amount of Social Security tax withheld that was reported on the Form W-2c to determine whether they had excess Social Security tax on wages paid in 2020.

If the corrected amount in box 4 of Form W-2c for 2020 causes the total amount of employee Social Security tax to exceed the maximum amount of tax that employees owe, they need to file Form 1040-X. This form is used to claim a credit for the excess Social Security tax withheld.

Keeping IRS Compliance High in an Unprecedented Year

Payroll taxes are confusing enough without the added stress of figuring out which regulations to follow and updated forms to use. With so many complex details and changes to manage, it is no wonder why so many businesses face errors and costly fines. However, staying compliant with the IRS is absolutely essential for any business.

Managing payroll taxes can be a time-consuming and difficult administrative task, but using the right technology can simplify payroll processing and give organizations time back to focus on other areas of the business. In addition to handling federal and state laws and payroll tax rules that constantly evolve, employers can outsource verifying check dates, confirming that taxable wages are calculated properly, and analyzing proper withholdings. Thus, they avoid tax complexities and ensure that their payroll is processed accurately while staying compliant with necessary regulations.

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