Guidance on Employee Tax Deferral

Guidance on Employee Tax Deferral

President Trump issued a Presidential Memorandum, that directs the Treasury Secretary to use his authority to defer the withholding, deposit and payment of employees’ portions of Social Security taxes from September 1 through December 31, 2020. The goal is to put more money in the pockets of workers during the COVID-19 pandemic emergency.

IRS Notice 2020-65, makes relief available for employers and generally applies to wages paid starting September 1, 2020, through December 31, 2020.  Employees would then repay the deferred Social Security tax on payrolls paid January 1, 2021 through April 30, 2021.

The employee Social Security tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.

The notice postpones the time for employers to withhold and pay employee Social Security taxes.  It gives guidance on determining who is eligible, when is the deferred tax due, how do employees pay it back, and is it mandatory.

Whether employers choose to follow the Notice or not, an employer should strongly consider letting its employees know whether deferral will be an available option, as many individuals are aware of the President’s action and may expect increased paychecks. 

Recommendation for Haynie Clients

We do not recommend this temporary deferral to our clients at this time. There are many unanswered questions as mentioned below. The employers will be liable for this deferral and be obligated to repay this on behalf of the employees during the period January 1, 2021 – April 30, 2021 or on May 1, 2021, there will be interest/penalties on unpaid taxes.  In addition, the employees will have that additional withholding on their wages during the time period in 2021 (if they are still employees). This could be a financial burden for some employees. Regardless, the employers are still liable.

The Notice leaves unanswered questions:
  • Should the employer allow employees to choose between deferral and no deferral or should it be automatic (most discussion to date has suggested that employees should not be burdened with a future payment unless they specifically agree to that burden)?
  • If an employee terminates employment owing back Social Security taxes, can an employer do catch-up withholding from the final paycheck?
  • Can an employer require an employee to sign a promissory note for the deferred tax amount?
  • If an employer is unable to collect the tax from an employee and pays that tax for the employee, is the payment of the tax additional wages? It would seem to be, and as additional wages, additional Social Security and income tax withholding would apply, all of which would be employer costs.
  • How does an employer prioritize the collecting repayments? Does the employer remit an employee’s health care and other welfare benefit premiums and 401(k) contribution first and then collect the deferred Social Security tax. Or will the employer have an obligation to collect the deferred tax first?
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