Deferral of Payroll Tax Withholding from the President’s Memorandum

Nov 4, 2020

Social Security

By Harry A. Steindler, CPA – Partner
September 4, 2020

On August 8th, the President issued a memorandum allowing, but not requiring, companies to defer the withholding and payment of the 6.2% employee share of social security taxes. The deferral payroll period runs from September 1, 2020 through December 31, 2020.

  • The operative word, though, is DEFER! The rules as laid out in the memorandum and more well defined by Treasury (Notice 2020-65), requires the amounts deferred to later be ratably withheld from those same employees (and deposited with the IRS) during the period from January 1, 2021 through April 30, 2021.
  • The option to defer is available to “Employers Affected by the Ongoing Coronavirus (COVID-19) Disease Pandemic”. The notice, memorandum, and comments from Treasury have made fairly clear that all employers are eligible.
  • The deferral is allowed only for employees whose wages are below $4,000 biweekly or equivalent amounts for pay periods of other duration. This amount is determined only for each pay period during the deferral period without regard to pay earned in another pay period.
  • If an eligible employee leaves the employer during or prior to the 2021 payback period, the employer is still responsible for depositing, ratably from January 1, 2021 through April 30, 2021, the entire amount deferred for that employee from September 1, 2020 – December 31, 2020.
  • If the above occurs (the employee leaves), the employer is permitted to “make arrangements to otherwise collect” the total taxes due from the employee. The Treasury and memorandum give no guidance on what these arrangements might be!

Things to Think About:

  • The Treasury notice does not obligate employers to defer taxes – this is an option for employers.
  • It is unstated by Treasury as to whether you need to get permission from employees to defer or not. We suggest though, that employers that wish to offer the deferral should consider informing employees of this option and asking them to affirmatively choose to have these amounts deferred and understand that these amounts will have to be paid back.
  • Employers should inform employees about their obligation to repay the deferred amounts in 2021, and that, to that end, additional amounts will be withheld from their paychecks during the 2021 period. They must also understand if they leave before those amounts have been withheld, they are obligated to pay that amount to the employer who in turn, will deposit those amounts with the IRS.
  • Employers who choose to participate should consider establishing an election form for employees to complete opting in or out of the deferral option.

Obviously, there is much that is still unclear about the deferral of employee social security tax. We assumed that Treasury will come forth with additional guidance on reporting both the 2020 deferral and the repayment in 2021.

One Final Point for Consideration:

The President has commented that, if reelected, he may make the deferral permanent, or perhaps the prohibition on withholding of social security tax permanent. As the program is currently set up, it’s likely that many employers and employees may opt out of deferring – since they will have to pay it back four months later. If the amounts somehow become permanently deferred though, well, that may be a different story . . . !

We will continue to closely monitor any new developments and keep you informed. If you have any questions, please contact your MichaelSilver tax professionals at 847.982.0333.