Payroll Tax Deferral Option for Employers
Under the umbrella of payroll-related provisions providing relief to employers and employees in response to the coronavirus outbreak comes one more - the Presidential Memorandum (Memorandum) on deferring the employee portion of Social Security Tax (released August 8, 2020). The Treasury and the IRS then issued Notice 2020-65 (the Notice), released August 28, 2020, which set out procedural and reporting guidelines for employers in connection with deferral of the employee portion of social security tax. The following information summarizes key components of both the Memorandum and the Notice.
What does it provide for?
Withholding, deposits, and payments with respect to the employee portion of Social Security tax on qualifying compensation paid during the period from Sept. 1 to Dec. 31, 2020, can be deferred by employers under a Memorandum signed Aug. 8 by President Donald Trump. Employers are responsible for ensuring deferred amounts of the employee portion of Social Security tax are paid to the government.
Amounts of the employee portion of Social Security tax that employers did not withhold, deposit, and pay based on qualifying compensation paid from Sept. 1 to Dec. 31, 2020, must be withheld, deposited, and paid during the period Jan. 1 to April 30, 2021.
The deferral provisions pertaining to the employee portion of Social Security tax apply only to compensation paid to employees whose biweekly pretax compensation generally is less than $4,000. If the employee’s pay period is other than biweekly, the employee’s pretax compensation for that pay period must be less than $4,000 as prorated for that period.
Do we have to do it? Or should we be doing it?
If an employee wants their portion of Social Security tax to be deferred but the employer does not want to implement the deferral, the employer would not be obligated to implement the deferral. An employer can also choose the degree to which its employees would be involved in the employer’s decision to implement.
A deferral? Or will it be forgiven?
The deferral of the employee portion of Social Security tax currently represents a delay. Employees will need to pay their portion of Social Security tax with respect to the period from Sept. 1 to Dec. 31, 2020. This is not an elimination of liability to pay Social Security tax for this period.
However, the Memorandum identified that there is a possibility that the deferral of the employee portion of Social Security tax will be transformed into an elimination of liability. The Treasury Department notes that they “shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this Memorandum.”
How do our employees pay this back, and what do we have to do?
The Notice refers to the need to withhold and pay the deferred Social Security tax “ratably from wages and compensation paid between January 1, 2021 and April 30, 2021”. Withholding and paying ratably in this regard does not refer to an amount of the tax not withheld and paid to the government during the four-month period from Sept. 1 to Dec. 31, 2020, needing to be withheld and paid at the same relative time in the following four-month period from Jan. 1 to April 30, 2021.
For example, it is not the case that an amount of the tax deferred and paid to the government with respect to compensation paid on Sept. 15 would need withheld and paid as close as possible to Jan. 15. Instead, withholding and paying ratably refers to determining the total amount of the employee portion of Social Security tax deferred and apportioning that total amount to be withheld in a proportional manner amongst the pay periods from Jan. 1 to April 30, 2021.
What if our employee leaves the company?
The Notice did not elaborate on what might occur if an employee separates from employment with the employer before the entirety of the deferred employee portion of Social Security tax was fully collected from the employee.
If such a separation occurs, the IRS clarified that the employer would be responsible for ensuring that the outstanding amount of the deferred employee portion of Social Security tax is nonetheless paid to the government. There is a possibility that this could cause a gross-up situation to occur with regard to amounts of tax paid by the employer on behalf of the employee, although the IRS is still examining this issue.
Employers have the responsibility of paying the deferred employee portion of Social Security tax. It is unclear what mechanisms would be applicable for situations in which an employee, who before April 30, 2021, separated from employment before the employer had the opportunity to fully withhold deferred Social Security tax from the employee’s compensation.
An employer could make an arrangement with an employee to collect the deferred amount of the employee’s portion of Social Security tax in a manner other than ratably if necessary. However, it is unclear whether an employer has the authority, under the Notice, to compel an employee who has separated before April 30, 2021, to guarantee that the employee, after separation, would provide to the employer, any deferred amount of the employee portion of Social Security tax; that otherwise would have been withheld from that employee’s compensation paid from Jan. 1 to April 30, 2021
We are here to help!
Reach out to us to discuss the implications of the President’s Memorandum and the Notice. If you have chosen to do this deferral, you may have questions related to your quarterly tax reporting; and as the year comes to a close, how it could affect your W-2 reporting. We will do our best to keep you abreast of any further developments and clarification related to this and other tax-related actions that come down.