Updated: Nov 17, 2020
On August 28, the IRS issued guidance that provides some explanation of how employers may defer withholding and remitting an employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.
The guidance is brief, and private employers still have questions about whether, and how, to implement the deferral. The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability. Worth noting is that neither the President’s action nor the Treasury notice requires that an employer defer withholding of the employees’ payroll taxes.
Tax deferral background
On August 8, President Trump signed a Presidential Memorandum that permits the deferral of the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic.
The memorandum directed Treasury Secretary Steven Mnuchin to defer withholding, deposit and payment of an eligible employee’s share of Social Security taxes (or the employee’s share of Railroad Retirement taxes) on wages or compensation paid from September 1, 2020, through December 31, 2020. It applies to employees whose wages or compensation, payable during any biweekly pay period, generally are less than $4,000, or the equivalent amount with respect to other pay periods. Amounts can be deferred without penalties, interest or additions to the tax.
Note: Under the CARES Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.
Issued on August 28, the three-page guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021, and ending on April 30, 2021. Penalties, interest and additions to tax will begin to accrue on May 1, 2021, for any unpaid taxes.
The guidance states that “if necessary,” the employer “may make arrangements to collect the total applicable taxes” from an employee. This appears to answer one question that employers have about what happens if an employee leaves a job later this year or before the deferred taxes are due. This is important as the obligation for deferred tax payments in 2021 rests with the employer, not the employee. However, no additional details are given on how an employer should make arrangements to collect unpaid tax.
Additionally, the determination of deferral eligibility with respect to an employee’s wages or compensation is performed on a pay period-by-pay period basis. As such, employees may flip between deferral eligible and non-eligible depending on the wages or compensation for that respective pay period.
Pushback from business groups
Before the guidance was issued, several business and payroll groups stated that their members would not implement the deferral. The U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral unworkable.
“If this were a suspension of the payroll tax so that employees were not forced to pay it back later, implementation would be less challenging,” the letter states. “But under a simple deferral, employees would be stuck with a large tax bill in 2021. Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law.”
The National Payroll Reporting Consortium, a payroll services industry association, stated there are “substantial” computer programming changes that are needed to implement the deferral.
“Payroll systems are designed to apply a single Social Security tax rate for the full year, and to all employees equally,” the consortium explained. “Applying a different tax rate for part of the year, beginning in the middle of a quarter, and applying such a change to some employers but not others, and to some employees but not others, is quite complex. Not all employers and payroll systems will be able to make these complex changes by September 1.”
There are still unanswered questions about the payroll tax deferral and many employees will likely be coming to you to understand their options. If you are considering this deferral opportunity, we recommend contacting your payroll provider before rolling out to employees to see if they will be able to accommodate the deferral. We will continue to monitor this situation and update you as more information becomes available. In the meantime, please feel free to contact us with any questions you may have.