Recently released IRS Notice 2021-11, implements the extension of the period for collecting from employees and depositing employee Social Security tax that was deferred in the last four months of 2020.  IRS Notice 2020-65 (see earlier coverage) had specified that the employer “must withhold and pay the total [deferred 2020 taxes] . . . ratably from wages . . . paid between January 1, 2021, and April 30, 2021.”  Many employers did not permit the deferral of such taxes.  For those that did, the Consolidated Appropriations Act, which was signed into law December 27, 2020, modified Notice 2020-65 by extending the time period during which the employer must withhold and pay the 2020 deferred employee Social Security taxes.  The period is now for the entire year − from Jan. 1, 2021, through Dec. 31, 2021.

The extension of time in which to collect the 2020 deferred employee Social Security taxes certainly spreads out the financial impact on affected employees’ paychecks across more pay periods in 2021, which is likely welcome relief to employees.  However, it also increases the risk that the employer may not be able to collect all of the deferred taxes in 2021, since an employee could leave employment at any time during the year.

As explained in our earlier coverage, employers are not relieved of the obligation to deposit the deferred employee Social Security taxes.  The employer remains liable for the payment of the deferred taxes, if the employer is unable to collect them from the employee.  In other words, if the employer is unable to collect all of the deferred 2020 taxes in 2021 from wages paid to the employee—because the employee leaves employment before or during that period—the employer must still deposit the deferred taxes or be exposed to late deposit and other penalties.  Moreover, if the employer does not deduct the 2020 deferred Social Security taxes from other remuneration paid to the employee in 2021 or otherwise collect the amount from the employee before the end of 2021, the employer’s payment of the employee’s 2020 deferred Social Security taxes constitutes compensation to the employee in 2021, and that compensation must be reported on a 2021 Form W-2 and subjected to payroll taxes.

Notice 2021-11 does not clarify whether an employer that elected to defer the employee share of Social Security taxes can, in fact, impose a shorter period of time to collect the deferred taxes from the affected employees in 2021, in order to minimize the risk of uncollectibility because of employee terminations during the year.  Notice 2021-11 simply states that the collection must occur during 2021 and that penalties, interest and additions to tax will now start to apply on Jan. 1, 2022, for any unpaid balances of 2020 deferred employee Social Security taxes.  (Because December 31, 2021, is a legal holiday, deposits made by January 3, 2022, will be considered timely.)

Print:
EmailTweetLikeLinkedIn
Photo of Marianna G. Dyson Marianna G. Dyson

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers…

Marianna Dyson practices in the areas of payroll tax, fringe benefits, and information reporting, with a specific focus on perquisites provided to employees and directors, worker classification, tip reporting, cross-border compensation, backup withholding, information reporting, and penalty abatement.

Ms. Dyson advises large employers on the application of employment taxes, the special FICA tax timing rules for nonqualified deferred compensation, the voluntary correction of employment tax errors, and the abatement of late deposit and information reporting penalties for reasonable cause. On behalf of the restaurant industry, her practice provides extensive experience with tip reporting, service charges, tip agreements, and Section 45B tax credits.

She is a frequent speaker at Tax Executives Institute (TEI), the Southern Federal Tax Institute, and the National Restaurant Association.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Mr. Chittenden advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Mr. Chittenden advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Mr. Chittenden counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Mr. Chittenden is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.