COVID Accounting Guidance
How to Account for Payroll Tax Deferrals
- You may collect the deferred tax through additional withholding from wages and compensation paid between January 1, 2021, and April 30, 2021.
- When employment is terminated before the deferred Social Security tax is recovered, make arrangements to otherwise collect the tax.
- From an accounting perspective, record both a receivable and a liability each time Social Security tax is deferred.
Have questions about payroll tax deferrals?
Early in August 2020, President Trump issued a presidential memorandum that allowed certain employees to defer their employee share of Social Security tax. On August 28, the IRS released Notice 2020-65, which provided guidance on the deferral, deposit, and payment of that employee share.
Learn how to collect and account for payroll tax deferrals if you’re an employer who decides to offer them.
How employers collect the deferred tax
We recently discussed what businesses need to know about payroll tax deferral, noting Notice 2020-65 states that employers must withhold and deposit the deferred tax. Employers can collect the deferred tax in one of two ways:
- Collection will occur through additional withholding, ratably, from wages and compensation paid between January 1, 2021, and April 30, 2021. Note that ratable withholding may be insufficient to fully collect the deferred tax if the employee’s earnings decrease after December 31, 2020 relative to the deferral period.
- When employment is terminated before the deferred Social Security tax is fully recovered, you may make arrangements to otherwise collect the tax, which may include withholding the appropriate amount of Social Security tax from the last paycheck. If that is insufficient, you (the employer or the responsible person) may be responsible for a shortfall.
All deferred tax is due by May 1, 2021, with interest, penalties, and additions to tax beginning to accrue at that point in time.
How to account for the deferred tax
From an accounting perspective, record both a receivable and a liability each time Social Security tax is deferred. The receivable is from each participating employee, while the liability is to the IRS.
While there is not initially any impact to income or expenses, the receivable and liability cannot be offset since they apply to different parties. Even if you fail to collect the deferred taxes from an employee, you will still owe the amount to the IRS.
If you’re unable to collect a portion of deferred taxes from employees, it may be necessary to reflect a loss. If material, record an allowance against employee receivables.
How we can help
Weigh your options — and consider the accounting ramifications — before you offer payroll tax deferrals. CLA can help you understand and respond to this evolving guidance, support key decisions, and understand the impact to your organization and financials. Please reach out to our team to discuss in more detail.