The calculator has been updated to reflect the changes made to the Internal Revenue Code by 2017 tax reform legislation, such as the elimination of personal exemptions.   To use the calculator, an employee provides information regarding the income that he or she and his or her spouse earn at each job, tax withholding per pay period, and tax withholding year-to-date.  The calculator allows an employee to input information regarding qualified retirement plan contributions (it is worth noting that the results page displays only the amount included in box for the employee’s contribution, but the calculation appears to take into account any contribution made by a spouse), cafeteria plan salary reductions (for HSAs, FSAs, dependent care accounts, health insurance, adoption assistance, group-term life, etc.), and other pre-tax reductions, such as for qualified transportation fringes.  The prompt, however, does not make it clear what should be included in the total as employees may be unfamiliar with the term “cafeteria plan” and no reference is made in the prompt to qualified transportation fringes.  In addition, the income information asks for “wages” and if the employee inputs “taxable wages” from his or her paystub and then includes pre-tax deductions, the recommendations may result in too little withholding.  The calculator includes expandable tips that explain that “total wages” means “gross wages” before any pre-tax reductions, but employees may not complete the form without seeing the additional guidance, which is only visible if the employee clicks on a question mark.

In addition to income and withholding information, the calculator also allows employees to account for “adjustments,” which are primarily above-the-line deductions, such as the educator expense deduction, student loan interest deduction, alimony paid, and non-payroll IRA deductions.  The items were included on Schedule 1 of the 2018 Form 1040.  The revised calculator allows employees to further refine the withholding calculation by electing to input itemized deductions or to make the withholding estimate using the standard deduction.  If the employee uses itemized deductions, the calculator will automatically take into account the $10,000 limit on state and local tax deductions.

Finally, the calculator allows employees to take into account various tax credits, including the child and dependent care tax credit, foreign tax credit, and educational tax credits.  The calculator provides links to other IRS tools and/or guidance to enable employees to determine whether they are likely to be eligible for the credits.

It is anticipated that the calculator will be revised to provide guidance on completing the 2020 Form W-4 after the end of the year.  Because of the elimination of personal exemptions, the draft Form W-4 released earlier this year requires employees to provide more personal information on the face of the form to achieve accurate withholding calculations.  The calculator will allow employees to achieve more accurate withholding from their paychecks without providing all of the personal information to their employers on the face of the 2020 Form W-4.  Regardless of whether the employee uses the withholding calculator or provides the information on the form itself, completing the 2020 Form W-4 is likely to be significantly more complicated and labor intensive than employees are used to.  Given public complaints earlier this year by taxpayers regarding reduced refunds or taxes due after filing their 2018 income tax returns, employers may wish to recommend that their employees use the new calculator to review their withholding determinations sooner rather than later.

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In 2021, if the employer withholds the 2020 deferred Social Security taxes, the employer must file a Form W-2c for 2020 reporting the additional withholding in Box 4.  Although the IRS guidance does not address this, if the employer pays in 2021 the employee’s share of Social Security taxes that were deferred in 2020, the employer must still file a Form W-2c reporting the amount as withheld Social Security taxes in Box 4.  Moreover, the employer would also be required to include the amount of taxes paid by the employer on the employee’s behalf as additional wages in Boxes 1, 3 (up to the OASDI wage base), and 5 on the employee’s 2021 Form W-2.  Because the employer’s payment of the employee’s deferred tax constitutes additional wages to the employee in 2021, these amounts will need to be grossed up to account for employment taxes on the amount of the employee’s tax paid by the employer if those taxes are not withheld from the employee’s other 2021 wages.

The IRS provided similar guidance for employers subject to the Railroad Retirement Tax Act.  In general, FICA wages up to the wage base should be reported in Box 14 of the 2020 Form W-2 along with any RRTA Tier 1  tax actually withheld.  The employer must then file a Form W-2c for 2020 reporting amounts of deferred RRTA Tier 1 tax withheld from the employee in 2021.

In either case, an employee is not required to take any steps in response to receiving the Form W-2c unless they had more than one employer during 2020.  If employed by more than one employer, the employee should confirm that excess Social Security or RRTA Tier 1 taxes were not withheld for 2020.  If excess taxes were withheld, the employee may file an amended personal income tax return to claim a refund of the amount of excess withholding.

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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.)

The post Time Extension for Employers to Collect Employee Social Security Tax first appeared on Solomon & Associates.

Solomon & Associates arranges a meeting of our clients with our team of CPA’s and Financial experts to provide our clients with the best possible ways to minimize their tax liability and some strategies that can be used for years to come.

We provide both Tax planning and tax Preparation for both our individual and business clients. For those that are expected to get refunds we maximize your refunds by using our experienced CPA’s to find all allowable deductions for your benefit.

Solomon & Associates uses the three way review process to make sure your taxes are accurate and prepared correctly and no deduction s are missed to ensure minimum tax liability and a maximum refund for our clients. We provide quality CPA work at affordable prices, ” its time for your to sit and relax during tax time and not to worry about what your tax preparer did wrong”

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