Employer Questions & Concerns: Deferring Employees’ Social Security Taxes

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08 Sep Employer Questions & Concerns: Deferring Employees’ Social Security Taxes

The IRS has provided guidance to employers regarding the recent presidential action to allow employers to defer the withholding, deposit, and payment of certain payroll tax obligations.

The three-page guidance in IRS Notice 2020-65, ‘Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic,’ was issued to implement President Trump’s executive memorandum signed on August 8.

Private employers still have questions and concerns about whether, and how, to implement the optional deferral. The President’s action only defers the employee’s share of Social Security taxes; it does not forgive them, meaning employees will still have to pay the taxes later unless Congress acts to eliminate the liability. (The payroll services provider for federal employers announced that federal employees will have their taxes deferred).

Deferral Basics

President Trump issued the memorandum in light of the COVID-19 crisis. He directed the U.S. Secretary of the Treasury to use his authority under the tax code to defer the withholding, deposit, and payment of certain payroll tax obligations.

For purposes of the Notice, “applicable wages” means wages or compensation paid to an employee on a pay date beginning September 1, 2020 and ending December 31, 2020, but only if the amount paid for a biweekly pay period is less than $4,000 or the equivalent amount with respect to other pay periods.

The guidance postpones the withholding and remittance of the employee share of Social Security tax until the period beginning on January 1, 2021 and ending on April 30, 2021. Penalties, interest, and additions to tax will begin to accrue on May 1, 2021 for any unpaid taxes.

“If necessary,” the guidance states, an employer “may make arrangements to collect the total applicable taxes” from an employee. However, it does not specify how.

Be aware that under the Coronavirus Aid, Relief, and Economic Security Act, employers can already defer paying their portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.

Many Employers Opting Out

Several business groups have stated that their members will not participate in the deferral. For example, the U.S. Chamber of Commerce and more than 30 trade associations sent a letter to members of Congress and the U.S. Department of the Treasury calling the deferral ‘unworkable.’

The Chamber is concerned that employees will get a temporary increase in their paychecks this year, followed by a decrease in take-home pay in early 2021. “Many of our members consider it unfair to employees to make a decision that would force a big tax bill on them next year… Therefore, many of our members will likely decline to implement deferral, choosing instead to continue to withhold and remit to the government the payroll taxes required by law,” the group explained.

Businesses also are worried about having to collect the taxes from employees who may quit or be terminated before April 30, 2021. In addition, since some employees are asking questions about the deferral, many employers also are preparing communications to inform their staff members about whether they are going to participate. If so, they are informing employees what it will mean for next year’s paychecks.

How To Proceed

Contact us if you have questions about the deferral and how to proceed at your business.