UPDATED: September 3, 2020
On August 28, 2020, the IRS and Treasury Department released Notice 2020-65 to provide guidance for employers who decide to participate in the employee payroll tax deferral under President Trump’s Memorandum on August 8, 2020.
The Notice gives employers the option to defer withholding the employee portion of the Social Security tax on applicable wages paid from September 1, 2020 through December 31, 2020. The deferred taxes would need to be repaid from January 1, 2021 through April 30, 2021.
The deferral is optional, not required, and, at this time, the notice is silent on whether employers are required to ask employees if they want to participate. Given the potential for significantly reduced wages in early 2021 for employees whose employer opts to defer withholding, employers may want to provide employees an election on whether to participate in the payroll tax deferral.
Applicable Wages Under Notice 2020-65
The Notice states that applicable wages would be wages that are less than the threshold amount of $4,000 paid bi-weekly or the equivalent threshold with respect to other pay periods. If the amount of wages is greater than or equal to the threshold, then the deferral is not available for that pay period. This is important to note for any employee whose wages fluctuate. If an employee receives additional compensation in a pay period such as a bonus or overtime, raising their wages equal to or greater than the threshold, they would not be eligible for the deferral in that pay period.
Based on the $4,000 paid bi-weekly, the threshold for other pay periods would presumably be:
- Weekly: Less than $2,000
- Bi-Monthly: Less than $4,333
- Monthly: Less than $8,666
Repayment of Deferred Taxes
Employers who choose to defer the withholding of employee Social Security taxes are required to withhold and pay the deferred taxes pro-ratably between January 1, 2021 and April 30, 2021. Alternative arrangements may need to be made if an employee leaves or if their wages are not sufficient to be able to collect both the deferred Social Security tax, as well as the tax that is currently due. The employer is still liable for the deferred Social Security taxes. If the taxes are not deposited by April 30, 2021, the employer could be subject to penalties and interest.
Employees would need to know that any deferred Social Security taxes would be withheld from January 1, 2021 through April 30, 2021, so employees could be subject to withholding for both the amount of deferred payroll taxes, plus the amount owed currently in 2021. This would significantly reduce an employee’s take home pay during those pay periods.
Congress has the ability to waive these payments. This would require legislative action, which has not occurred. Taxpayers should be prepared to remit these funds to the IRS next year.
If employers are considering participation in the deferral, we encourage them to consult with their BSSF Advisor as every situation will be different.
If you have questions about the guidance, contact BSSF today!
Disclaimer: This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our Firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.