On August 8, 2020, President Trump issued an executive memorandum to benefit taxpayers amid COVID-related financial turmoil. This order called for a deferral of the employee portion of Social Security tax (typically withheld at the rate of 6.2% of wages) – from September 1, 2020 through December 31, 2020.
He also called on the Secretary of Treasury to seek ways to “eliminate the obligation to pay the taxes deferred” – or in other words, forgive the amount deferred. However, Congress has not yet passed any legislation to accomplish this.
On August 28, 2020, just four days before the order became effective, the Internal Revenue Service and the Treasury Department released guidance on the deferral, which many found to be insufficient. It left many Americans scrambling for more information.
According to Notice 2020-65, employers are responsible for both the deferral and future collection and remittance of the deferred taxes. The order applies to pay dates occurring between September 1, 2020 and December 31, 2020 for those making less than $4,000 in a bi-weekly pay period. The IRS recognizes that the deferral may apply to an employee during some pay periods and not others if income fluctuates. Employers are still required to withhold the employee portion of the Medicare tax (generally 1.45% of wages). The employer portion of both taxes is already eligible for deferral through previous tax legislation.
Per the guidance, the employer should increase the withholding from the employee’s pay between January 1, 2021 and April 30, 2021, in an amount equal to the taxes deferred between September 1, 2020 and December 31, 2020. After April 2021, the employer is subject to penalties and interest on any unpaid, deferred taxes.
The National Finance Center, which is in charge of payroll for more than 600,000 federal workers, reported that it will be deferring taxes for eligible employees – without giving them the option of opting out.
However, many professionals are advising employers against implementing the deferrals. Why? Many employers have not had time to implement the necessary changes to payroll software systems. Also, without any guarantee that the deferred amounts will be forgiven, and the burden on employers to collect the deferred amounts in the future, those who implement the deferral may be liable to the IRS come January in the event employment is terminated for an individual with unpaid deferred taxes.
Here are some of the questions you might have…
With little information from the announcement, we’ll try to shed light on some of the confusion you may be experiencing.
1. Is the payroll tax deferral voluntary for the employer or employee?
The notice makes clear that the employer is the affected taxpayer but does not explicitly say it is voluntary. However, it also does not make it mandatory. Based on our interpretation, it seems to be up to the employer to decide whether or not to implement this deferral.
2. What happens if an employee’s pay exceeds $4,000 for one biweekly pay period but is below it for another?
According to the guidance, the deferral is made on a paycheck to paycheck basis. The full payroll tax would be deferred in any bi-weekly pay period where gross wages are below $4,000 and would be withheld as normal in any bi-weekly pay period where pay exceeds $4,000.
3. What happens if an employee no longer works for an employer once the deferral is over? Is the employer responsible for the unpaid taxes?
This is where the guidance leaves a little too much room for interpretation. It implies that it is the employer that is responsible for withholding and remitting the deferred taxes but indicates that the deferred taxes are to be withheld from employees’ checks beginning in January.
The notice goes on to say that “If necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.”, but it does not go on to elaborate what that might mean.
4. I missed the September 1 decision. Can I still decide to defer withholding?
The guidance gives no indication on whether an employer must defer the withholding for the entire deferral period (9/1 to 12/31) or whether they can start deferring at any point during it. Because the notice does not specify otherwise, it appears that an employer could elect to implement the deferral at any point during the deferral period.
5. Can an employer continue to withhold the tax, but suspend depositing it with the Treasury?
No, the guidance dictates that the deposit obligation is linked to the date that the tax is withheld. If you do not suspend the withholding of the Social Security tax, you must remit it according to your normal deposit schedule.
6. What might happen next?
Employers will have to make their own decisions about how to proceed, but there seems to be two possible scenarios that could play out:
Scenario 1: Congress takes no action, and employers follow the limited guidance offered. To recoup and remit the deferred taxes, Employers that suspend the withholding of the Social Security portion of payroll taxes this year will have to increase withholding beginning in January to repay what was deferred. Employers who do not suspend the withholding of taxes this year will operate as normal both this year and next.
Scenario 2: Congress acts to forgive the deferred taxes or provides a substitute policy. It is possible that Congress could act to simply forgive the deferred taxes, although this would result in inequity for employees whose employer elected to not suspend withholding. Congress may seek to address this through an additional, follow-up policy.
Can’t decide what’s right for your business?
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