IRS Issues Form W-2 Reporting Rules for Deferred Employee Social Security Tax

IRS Issues Form W-2 Reporting Rules for Deferred Employee Social Security Tax

On its website, the IRS has provided special instructions for reporting any deferred amount of employee Social Security tax on the 2020 Form W-2, Wage and Tax Statement [Form W-2 Reporting of Employee Social Security Tax Deferred Under Notice 2020-65, 10/29/2020].

Tax deferral. An executive memorandum issued by President Trump in August authorized the deferral of the employee portion of Social Security tax during the period from September 1 through December 31, 2020. The deferral is to apply to employees whose wages for a bi-weekly payroll period generally equal $4,000 or less on a pre-tax basis or an equivalent amount with respect to other pay periods [Memorandum for the Secretary of the Treasury, Deferring Payroll Tax Obligation in Light of the Ongoing COVID-19 Disaster (8/8/2020)].

Follow-up guidance from the IRS provides that employers, not employees, had the option to defer the employee tax—and the obligation to pay up [Notice 2020-65, 2020-38 I.R.B. (9/14/2020]. Therefore, the notice defers the due date for employers to withhold and deposit the employee share of Social Security tax for September through December 2020. Moreover, the notice provides that the deferred tax is to be withheld and paid from wages paid between January 1 and April 30, 2021. Penalties, interest, and additions to tax will apply beginning May 1, 2021. However, if necessary, the IRS says that the employer can arrange to collect the tax from the employee.

Form W-2 reporting. Employers that exercised the option to defer the employee share of Social Security tax should report the total amount of an employee’s Social Security wages, including any wages for which the employee portion of Social Security tax was deferred, in Box 3 (Social Security wages) and/or Box 7 (Social Security tips) of Form W-2.

However, the employer should not report the deferred employee tax that was not withheld in Box 4 (Social Security tax withheld) of Form W-2. Instead, when the deferred amounts are withheld in 2021, the employer should report the amounts in Box 4 of a Form W-2c, Corrected Wage and Tax Statement, for 2020.

On Form W-2c, the employer should enter tax year 2020 in Box c (Tax year/Form corrected) and adjust the amount previously reported in Box 4 of the original Form W-2 to include the deferred amounts withheld in 2021. Form W-2c must be filed with the Social Security Administration (SSA) and furnished to the employee.

Employee reporting. No action is generally required if the employee had only one employer for 2020. Assuming the only correction on Form W-2c was for the deferred Social Security tax, the employee can file the form and forget it.

If the employee had more than one employer for 2020, the employee should use the corrected amount shown in Box 4 of Form W-2c to determine if the employee had excess Social Security tax withheld on wages for 2020. If the corrected amount on Form W-2c causes the total amount withheld by all employers to exceed the maximum employee tax of $8,537.40 for 2020, the employee should claim an individual income tax credit for the excess Social Security tax. Assuming that the employee has already filed a return for 2020, the credit can be claimed by filing a Form 1040-X, Amended U.S. Individual Income Tax Return.

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