UPDATED (August 31, 2020) IRS Releases Guidance on Deferral of Employee Social Security Tax Withholding
The Treasury Department has issued its official guidance on the payroll tax relief that President Trump granted in his August 8 Presidential Memorandum but the guidance has left many questions unanswered which we hope will be addressed in future guidance. Notice 2020-65, issued on August 28 provides that employers postpone the Social Security tax withholding for employees with a bi-weekly pay of less than $4,000 or the equivalent amount if paid on a different pay period. The postponement of withholdings applies to wages paid between September 1, 2020 and December 31, 2020. The employees’ Social Security taxes not withheld during this time will be deducted ratably from employees’ paychecks between January 1, 2021 and April 30, 2021 and employers must remit them to the IRS timely. The employer may make other arrangements to collect the total applicable taxes from the employee. Any taxes unpaid as of May 1, 2020 will be increased by interest and penalties. The notice doesn’t indicate that the employer is required to follow the Presidential Memorandum.
On August 8, 2020, President Trump signed an executive order that allows for the deferral of Social Security taxes for many employees to offer continued relief due to the coronavirus (COVID-19) pandemic.
This executive order directs Treasury Secretary Mnuchin to use his authority to defer the withholding, deposit, and payment of the employee’s share of Social Security tax (6.2% of wages up to $137,700) on wages paid from September 1, 2020, through December 31, 2020.
The deferral is available only to employees earning less than $4,000 each biweekly payroll period, or $104,000 per year (calculated on a pretax basis).
Secretary Mnuchin is ordered to provide guidance to implement the executive order. In an interview on Fox Business News, Secretary Mnuchin stated “we can’t force people to participate, but I think many small businesses will and pass on the benefits.” From that statement it appears employers are not required to allow the employees to defer the Social Security tax. Even with his statement and until further guidance is provided, there exists uncertainty for both employers and employees. If the employer offers this benefit, may employees choose not to have the deferral apply to their compensation? If the taxes are deferred, when must the deferred amounts be repaid? What happens if an employee leaves the employer before the deferral is paid back? Who is responsible for repaying the deferred Social Security taxes; the employee at the time of filing the individual income tax return for 2020 or the employer?
If employers take advantage of this opportunity, employees might find it difficult to find the funds to repay the Social Security taxes when the deferral ends.
The executive order is also likely to face court challenge under claims by some lawmakers that the President has exceeded his constitutional authority.
The executive order can be found [here].
What Should You Do?
There is nothing for an employer to do at this time. Payroll service providers are monitoring the issue and will make appropriate changes to the payroll software once the guidance is issued. Employers using their own software will also need to watch for guidance to make adjustments.
We will provide additional information as it becomes available.
Please contact us at 401-831-0200 if you have questions or would like to discuss how this executive order applies to your situation.