Payroll Tax Deferral Memorandum – The Internal Revenue Service has issued Notice 2020-65 to provide guidance on the employment tax deferral regarding President Donald Trump’s August 8, 2020 Executive Order.
Deferral Payroll Tax Period
The executive memorandum is effective immediately and only applies for wages “paid” between 9/1/2020 and 12/31/2020. The deferral is only on the 6.2% social security income tax portion assessed on employees only. The deferral does not apply to the 1.45% hospitalization portion of payroll taxes. The order does not affect the assessment of the portion of the tax on employers. The deferral affects employees making less than $4,000 during a bi-weekly pay period ($104,000 annually). If wages exceed the limit, no deferral will be available. The order is only a “deferral” of the tax on employees and not a permanent elimination. Affected employees will need to repay this deferral. The tax deferral is elective to the employees. The order does not impose a requirement to defer the tax.
Deferral Repayment Period
Pursuant to the Notice 2020-65, the due date for the withholding and payment of the employee share of Social Security taxes on certain wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. The deferral may be applied only on Applicable wages or compensation paid to an employee during the period beginning on September 1, 2020, and ending on December 31, 2020.
The notice clarifies that the determination of Applicable Wages. The determination of Applicable Wages is on a period-by-pay period basis. The amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided in the notice applies to those wages or that compensation paid to the employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Employer Responsibility for Deferral Payroll Tax Withholding Repayment
The notice provides that an employer must withhold and pay the deferred Social Security taxes ratably from wages and compensation paid between January 1, 2021, and April 30, 2021, or interest, penalties, and additions to tax will apply. The notice pushes the liability to the employer to make arrangements otherwise to collect the total deferred taxes from the employee. While the notice does not require employers to defer withholding the employer portion of Social Security taxes on Applicable Wages of all employees to comply with the notice, it does not address whether employers must honor requests by employees to have their Social Security taxes deferred in accordance with the notice. Additionally, the notice does not release employers from liability for the deferred Social Security taxes if they are unable to collect the deferred Social Security taxes from employees. For example, if an employer is unable to repay the Social Security taxes deferred pursuant to the notice because the employer no longer employs the employee in January 2021, it appears that the employer will need to repay the deferred Social Security taxes from its own funds. While the employer may make other arrangements to collect the deferred Social Security taxes from terminated employees, this will not be a practical solution. Additionally, even where employees remain employed by the employer, employers may face serious resistance from employees experiencing a potential double deduction in Social Security taxes during a possible ongoing pandemic. Make sure you inform employees that the expectation that deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021.
Some recommendations to consider if you are expecting to implement the payroll tax deferral:
• Have employees sign a contract agreeing to additional withholding. The agreement should spell out that the additional withholding may be up to twice the normal amount of Social Security taxes in the period from January 1 through April 30, 2021.
• Have a plan to account for repayment of deferred payroll taxes if some affected employee may earn less in 2021 than in 2020.
• Make sure your payroll provider understands their obligations and can provide the appropriate payroll adjustments to reflect the deferral as well as the adjustments for next year, to include the repayment of the deferred amount in the employee paychecks.
• Amend the employee contract or have a separate agreement for the employee to reimburse the employer for any unpaid deferred payroll taxes should the employee leave the company.
In summary, although it may appear to help with the employee’s cash flow in the short term, the catch up of the deferral is administratively cumbersome and presents a hardship to the employee’s withholding for 2021 because the employees will need to double up their social security withholdings on each pay period. In addition, it also presents issues for the employers if employees are no longer with the company and have not repaid the deferral.
Maria is a partner at Wilke & Associates servicing closely-held businesses in manufacturing, real estate, transportation/logistics, and technology industries as well as high net worth individuals and executives in delivering effective tax strategies.