What We (Don't) Know About The Employee Payroll Tax Deferral
Posted on August 31, 2020
On August 8, 2020, President Trump issued a Presidential Memoranda directing the Department of Treasury to defer certain employees' shares of Social Security taxes between September 1, 2020 and December 31, 2020. The deferral is available for any employee with biweekly pretax compensation of less than $4,000 (or the equivalent amount with respect to other pay periods). While Treasury Secretary Mnuchin informally clarified that deferral would not be mandatory, Treasury issued no official guidance until Notice 2020-65, released on August 28, 2020.
Notice 2020-65 postpones the effective date of the deferral repayment such that employers must ratably withhold and pay these deferred taxes from the wages paid to the employee during the period from January 1, 2021 through April 30, 2021. Interest, penalties and additions to tax will begin to accrue on any deferred taxes that remain unpaid as of May 1, 2021. The Notice provides that employers may make arrangements to collect the deferred taxes from the employee, if necessary. The Notice specifies that the deposit obligation for employee Social Security tax does not arise until the tax is withheld. Accordingly, by postponing the time for withholding the tax, the deposit obligation is delayed by operation of the regulations.
The Notice also clarifies that the normal exclusions from the definition of compensation under the Tax Code apply to determine whether an employee's compensation falls under the equivalent $4,000 threshold for the pay period. In addition, compensation must be determined on a pay period-by-pay period basis, so if an employee is below the threshold amount for only one pay period, the employee's Social Security taxes can still be deferred for that period.
The U.S. Chamber of Commerce previously submitted a letter to Congress and Secretary Mnuchin raising concerns regarding the Memoranda and concluding that many of its members will likely decline to implement the deferral. Other employers took steps to defer despite the lack of guidance. The National Finance Center, a federal government agency division under the U.S. Department of Agriculture providing payroll services to more than 600,000 Federal employees, notified its customers of modifications to implement the deferral. Specifically, the NFC stated that effective for the first pay period after September 1, 2020:
NFC will eliminate the [Social Security] employee deductions for all employees whose gross social security wages that are less than $3999.99. We will continue to calculate and remit the employer portion of [Social Security]. With that being said, the elimination of the withholding will vary by employee by [pay period], based upon any changes in their gross social security wages.
Employees whose normal wages would not exceed the $3999.99 but who are working a tremendous number of hours due to COVID or other circumstances that increase their wages over the $3999.99, would have [Social Security] withheld from their salary.
The elimination of employee deductions is only applicable to those employees who are in a retirement coverage code where [Social Security] is normally deducted and will not impact those who do not normally have [Social Security] withheld (e.g. Civil Service Retirement System (CSRS) employees).
The executive order refers to the fact that this is a deferral of the deductions, and Treasury should look to have legislation put in place so that employees do not have to pay back these deferred amounts. NFC will provide additional information as it becomes available.
The Memoranda directed Treasury to explore ways to eliminate the obligation to pay the deferred taxes altogether, which the President has expressly stated will be his goal if reelected. Secretary Mnuchin has acknowledged that Congress would likely need to provide funding in order for these deferred taxes to be forgiven. To date, a payroll tax cut has generally not been supported in Congress, so it remains unclear whether Congress would provide the necessary funding.
Several open questions regarding implementation of the deferral remain, and we expect more guidance regarding repayment from the IRS before January 1, 2021. At present, employers should be very cautious about implementing the deferral, especially because the deferral may create a hardship in 2021 for employees who live paycheck to paycheck. It is also unclear whether deferred taxes will be eligible to be counted as "payroll costs" in calculating loan forgiveness under a Paycheck Protection Program loan. At a minimum, employers who are electing to allow this deferral (which is not mandatory for employers) should notify their employees, in writing, of the opportunity to elect deferral of their Social Security taxes with a reminder that these deferred taxes must be withheld and paid ratably from January 1, 2021, through April 30, 2021, to avoid additional tax, interest and penalties absent changes to the law. Employers should require that an eligible employee sign an acknowledgement that they wish to "opt in" for the deferral, so that there is no later question as to whether the employee understood this election.
You can find IRS Notice 2020-65 by clicking on "guidance" here: https://www.irs.gov/newsroom/guidance-issued-to-implement-presidential-memorandum-deferring-certain-employee-social-security-tax-withholding.
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