Social Security Tax Deferral and Home Office Deduction

Greetings to all as we have kicked off another school year and look forward to Labor Day weekend. Today we are covering an update on the social security tax deferral, the home office deduction, as well as our usual updates and reminders.

Social Security Tax Deferral Update

The IRS recently issued Notice 2020-65 regarding the deferral of employees’ social security withholding. The Notice clarified some items mentioned in our last communication, but some areas of concern remain unanswered.

Items that were clarified:

  • The $104,000 annualized compensation is on a per pay by per pay basis. If an employee is paid weekly and they earn $1,999 their wages qualify for postponement. If the next pay period they earn $2,001 the wages paid that pay period don’t qualify.

  • Compensation is defined as gross compensation before any pretax items. If an employee is paid weekly and their gross pay is $2,100 and they defer $150 into their HSA (meaning their taxable SS wages are $1,950) they don’t qualify for deferral because their gross pay is $2,100. However, there is disagreement over how the wage threshold is calculated. More to come on this topic.

  • An employer must withhold and deposit any taxes deferred under this Notice pro rata during pay periods paid between January 1, 2021 and April 30, 2021. 

Areas of concern:

  • The deferral window started September 1. Many companies already have their payroll completed for this week and it is highly unlikely their software contained the update to defer employee SS tax.

  • The Notice does not adequately indicate if the deferral is optional for employers and/or employees – can one or both elect out of the deferral?

  • If employment is terminated, the employer is responsible for the deferred amount and would need to recover it from the former employee. That could be an administrative nightmare and burden to employers. Also, if the employer is unable to recover the amount, it would be considered taxable wages to the former employee.

  • As was mentioned in our previous communication, the elimination of the obligation to repay the deferred taxes will still require Congressional action.

  • There was no mention of self-employed individuals.

Finally, if social security taxes are deferred, we recommend that the employer have the employee sign a statement to authorize the tax deferral and acknowledge that the deferred tax will be withheld in 2021. The statement should also explain repayment if employment is terminated before all the deferred taxes are recovered.

Home Office Deduction

In today’s world, people are working from home more than ever. This has many individuals inquiring on the availability of the home office deduction. Below are some bullet points regarding that deduction.

  • There must be a dedicated area of the home used exclusively for conducting business on a regular basis.

  • For an employee, this deduction falls in the category of “Miscellaneous Itemized Deductions.” These deductions were suspended until 2025 under the Tax Cuts and Jobs Act of 2017, so absent new legislation, most taxpayers are unable to benefit from this deduction until 2026.

  • Partners in partnerships and businesses reported on Schedule C can benefit from deducting home office expenses. Thorough records must be kept to substantiate the amounts.

For more details, click here to read an article from the Journal of Accountancy.

Updates and Reminders

September 15th Deadline – As mentioned in our previous communications, the extended due date for calendar year end partnerships and S-corporations is right around the corner. Also, don’t forget that many third quarter estimated payments are due on September 15th. Please don’t hesitate to reach out to us with any questions.

Individual Year-end Planning – It’s never too early to think about year-end planning and projections. Below are some items for individuals to think about:

1. Retirement plan contributions
2. Charitable giving
2. Gifting
4. Education funding

Your Bertz, Hess & Co. tax and business advisor will be happy to discuss any of these topics.

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