With extraordinarily poor timing, the Treasury Department and the Internal Revenue Service have finally issued guidance (Notice 2020-65) allowing employers to defer certain employee payroll tax obligations for the remainder of 2020, and to withhold the deferred amounts during the first four months of 2021.
This guidance was issued in response to a Memorandum issued by President Trump on August 8, 2020, which directed the Treasury Secretary to use his authority to defer the withholding, deposit, and payment of the employee’s portion of OASDI tax on wages paid from September 1, 2020, through December 31, 2020. (see related post)
However, the IRS and Treasury did not release any guidance on this issue until August 28, 2020, with an effective date of September 1, 2020. The Notice sets forth the following:
- The due date for the withholding and payment of the employee’s portion of the 6.2% old-age, survivors and disability insurance (OASDI) tax (Social Security tax), and the employee’s portion of the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2% Social Security tax, on applicable wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021; and
- The deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2021, and April 30, 2021.
The guidance states that it does not separately postpone the deposit obligation for employee Social Security tax. This is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee’s Social Security tax, the deposit obligation is delayed by operation of the tax regulations.
Applicability of Deferral
The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies. This limitation equates to $104,000 in annualized wages. The deferral applies to wages under Code Sec. 3121(a) or compensation under Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020.
The determination of applicable wages is made on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period, and the relief provided in the guidance applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Payment of Deferred Amounts
An affected employer must withhold and pay the total applicable taxes that it has deferred ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid applicable taxes. If necessary, the affected employer can make arrangements to otherwise collect the total applicable taxes from the employee.
Impact of Deferral for Employees
The purpose of the President’s Memorandum was, of course, to put more money in the pockets of America’s earners. However, it cannot be over-emphasized that this opportunity to enhance employees’ take home pay is simply a deferral and NOT a permanent tax reduction. As such, with the catch-up provisions set forth in the Notice, it is certain to reduce pay by twice the normal social security tax in the first four months of 2021.
As an example, presuppose an employee makes $2,500 gross pay on a bi-weekly basis. The 6.2% social security tax deferral will allow the employee to keep an additional $155 per pay period. In other words, his/her net pay will increase by this amount for the remainder of 2020.
However, between January 1, 2021 and April 30, 2021, the employee will be required to pay these deferred amounts back through larger social security tax withholdings. These withholdings will not only require payment of the social security tax obligation for the first quarter of 2021 at 6.2%, but also the “repayment” of the amounts deferred in 2020 under this guidance.
Thus, assuming no change in compensation level, the employee will see the $155 less in his/her take-home pay starting in January 1, 2021, for 2020 catch up. Additionally, another $155 will be taken from each paycheck for the normal social security tax withholding for 2021. This equates to the employee incurring a $310 swing (decrease) in pay from his/her last paycheck in December 2020 to his/her first paycheck in January 2021.
Impact of Deferral for Employers
Employers are struggling with the options available and have inquired as to whether they are able to simply continue to withhold social security tax on employees through 2020, with the thought that disturbing employee net pay to merely defer the payment is administratively burdensome for both the employer and the employee.
To date, we have observed no authoritative guidance on this issue and without such direction, it is seemingly apparent that the employer currently has no flexibility in this decision. We suggest that employers contact their payroll services as soon as possible to confirm the administrative approach required in light of this most recent guidance.