Employee Requesting to Defer Wages

[Tyson]

Hello,

I have an employee requesting to defer his wages until after January 1st. He says that for the remainder of this year he needs to pay Social Security one dollar for every two that he earns and wants to avoid this. Can we do this?

[Harold Mansfield]

Hello,

I have an employee requesting to defer his wages until after January 1st. He says that for the remainder of this year he needs to pay Social Security one dollar for every two that he earns and wants to avoid this. Can we do this?
In short, no. You should not assist your employee with his tax scheme.
I can't imagine why he pays more than everyone other person in the United States, but that's not really your problem. It's his. I noticed you said that he "needs" to pay.

If he get's caught or audited for doing something shady, you're getting called in right along with him and now they're going through all of your records.
You don't need that.

Do what you're supposed to and let him work out his tax/social security problems on his own.


If he were a company officer or owner in the business he could do whatever he wants with his own salary...take a dollar salary and the rest in stock and so on. But since he's an employee and you pay him...no. Stay above board.

Another option is to pay him as an independent contractor with no benefits and then he'd be responsible for his own taxes, insurance and so on. But are you willing to do that for other employees?

[Fulcrum]

I'm with Harold. Don't do it.

[Tyson]

Thank you for the responses!

Why would a person be required to pay social security one dollar for every two they earn? He says he was collecting social security. Maybe he needs to pay back what he collected?

Another variable to take into account:
Our employees are paid commission only. We let them decide how they want their commissions payed. They can have it one lump sum or spread out over a period of time. What's the difference between this employee asking to be payed after January 1st and another employee wanting his compensation deferred for no particular reason? Could we just disregard/ignore his reason for wanting his payment deferred?

[Freelancier]

I'm the devil here: I don't see what the employee is talking about. There's NO part of SS that requires you to pay more than 6-7% of income as an employee. So whatever he thinks he's doing is probably going to turn out to be wrong. And it might affect your numbers for health care or other benefits that requires you pay your employees a certain amount at least a certain amount for the month and year, so check that.

But if it does not impact your business one bit (other than the payroll settings), then I'd have him sign something that he is voluntarily requesting to defer his paychecks until the first payroll period after or including January 1 at no penalty to the business and every dollar he receives on January 1 will be taxed at the tax rates for 2016... AND that he cannot make this request again in 2016 (because why should you be subject to having this happen every year?).

[Harold Mansfield]

Another variable to take into account:
Our employees are paid commission only. We let them decide how they want their commissions payed. They can have it one lump sum or spread out over a period of time. What's the difference between this employee asking to be payed after January 1st and another employee wanting his compensation deferred for no particular reason? Could we just disregard/ignore his reason for wanting his payment deferred?

Well this is new information. If you're already set up to pay people whenever they want to be paid, then I see no difference. Commission only means they're responsible for their own taxes, so now I really don't know what he's talking about.

Sounds a little strange to me. I'd probably speak with an accountant now, rather than having to speak to a lawyer later.

[Freelancier]

I suspect that this may be one of those people who don't understand how tax brackets work.

[Tyson]

Thank you again for the responses.

Yes this will not affect us at all. We will just have some Wages Payable on our books for a couple months.

Harold: Our employees are commission-only, but they are not independent contractors; They are W2 employees.

I will go with Freelancier's suggestion. I'll add a note at the bottom of his commission agreement that shows how he requested to be compensated. I was just a little confused as to how this would work considering that our books will show that his commission was earned in 2015 but was not payed until 2016. And if we could be implicated legally for helping him to avoid paying more Social Security taxes for 2015.

[Harold Mansfield]

I will go with Freelancier's suggestion. I'll add a note at the bottom of his commission agreement that shows how he requested to be compensated. I was just a little confused as to how this would work considering that our books will show that his commission was earned in 2015 but was not payed until 2016.

I'm pretty sure that you still have to record it accurately. If he's asking not to show the income till 2016 I'm pretty sure that can get you in trouble and now he's asking you to be an accomplice to his scheme.

[Tyson]

It will be recorded. This is not something we can hide. Also I believe that taxes are not considered due until the employee's wages are actually payed to the employee.

[Fulcrum]

Why would a person be required to pay social security one dollar for every two they earn? He says he was collecting social security. Maybe he needs to pay back what he collected?

This is probably the primary reason. He's now off the public trough and has earned enough (good for him) to require payback of what he received earlier in the year (unless the US social security system is that much different from the Canadian version). Personally, I say keep paying him and he can return some of those tax dollars the rest of you have paid to help him out.

[Tyson]

Update:

I found this website: https://www.socialsecuritytiming.com/index.cfm/knowledge-base/articles/how-to-fix-a-social-security-mistake/. This is probably what our employee is doing:


If the client is outside the 12-month window and decides he wants to go back to work between the ages of 62 and Full Retirement Age (FRA), his benefits will be subject to an earnings test. The 2012 earnings test exempt amount is $14,640 ($38,880 in the year the client turns FRA). Social Security will withhold $1 in benefits for every $2 of earnings in excess of that amount. This is not a tax!

Let’s say your client elected benefits at 62 and was receiving an $1,800 monthly benefit (75% of $2,400) and now wants to go back to work at 63 earning $90,000 per year. If you subtract $14,640 from $90,000, you get $75,360. Divide that by two, and the earning penalty would be $37,680. Since that is greater than the total Social Security benefit of $21,600, the client would not receive any Social Security for this period.

The reason we want to be very clear that the “earnings penalty” is not a tax is because Social Security would adjust the reduction on this client’s benefits for each month in which he didn’t receive a check due to the earnings test. If this client actually received benefits for the 12 months he was 62, but then worked and did not receive any further benefits until age 66, the Social Security Administration (SSA) would go back to his record and adjust his benefit upwards. They will treat it as if he had originally elected at 65 instead of 62, so he would then begin receiving a check for $2,240 plus any Cost of Living Adjustments that had accrued.

[jamesray50]

I have run across this with older employees. If they took the early SS retirement or are collecting SS disability there is a limit on the annual wages they can earn from a job, once they reach the limit then SS will reduce their benefits for the remainder of the year. Usually the employee would not work the rest of the year if that was a possibility with their employer or they would work and accept the reduction they received. The only way an employee can defer wages is if they are contributing to some kind of retirement plan. It would be too late this year for an employee to sign up for deferrals this year. I have also had owners and officers of corps defer their bonus until the following year, but those are different circumstances and would not apply to your employee.

[Fulcrum]

If I read Tyson's quote correctly, would the employee not be ahead if he just kept working and rebated the SS?

[Freelancier]

Yes, but he's trying to maximize both. The best way to do that is to reach the limit for employment income and defer the rest into next year assuming he doesn't work as hard next year or he doesn't work at all next year. I sometimes do the same thing with holding invoices for some customers until Dec 15, so they can take the expense this year, but I can take the income next year which might not be as good a year as this year (and gives me a huge pop of cash in January to pay bills, but that I don't owe taxes on until end of year).

[jamesray50]

I want to point out that even though some type of earnings can be deferred, wages paid for hourly or salaried work cannot be deferred. Wages are governed by the state wage and hour board. Each state has their own rules on how often wages need to be paid and how long after the end of a pay period they need to be paid. You could be in violation of your state'so wage and hour laws if you did not pay the employee on time.