This past Friday night the IRS released Notice 2020-65, the much anticipated guidance regarding implementation of the August 8, 2020 presidential memorandum providing for the deferral of the withholding and payment of the employee portion of social security taxes. The deferral period begins on September 1, 2020, and ends December 31, 2020.
The deferral of the employee portion of the social security taxes applies to employees earning less than $4,000 in taxable wages during a biweekly period. The determination of whether the employee is earning less than the threshold $4,000 dollar amount is made on a pay period-by-pay period basis. Consequently, if the wages or compensation payable to an employee for the given pay period are less than $4,000 then the relief outlined in the notice applies. No deferral is permitted for any payment of $4,000 or above in a biweekly period.
Employers should tread carefully in choosing whether and how to implement the deferral. Employers are instructed to withhold and pay the total deferred taxes ratably between January 1, 2021 and April 30, 2021. Accordingly, although employees will have an immediate increase in take home pay from September 1 through December 31, 2020, the amount that was deferred will need to be factored in as an additional biweekly tax after the holiday, and will likely reduce overall take home for each pay period between January 1 and April 30, 2021. Employers will need to communicate any differences that the employees may see in their paychecks in order to manage expectations.
The notice provides that “if necessary” the employer “may make arrangements” to withhold and pay the total deferred taxes. While this sounds like it offers employers additional flexibility, no such arrangement is specifically outlined and it reinforces that the employer is required to pay the deferred tax and must make arrangements to ensure timely payment. The notice is clear that employers must withhold and deposit the deferred taxes in full by April 30, 2021, or penalties, interest, and additions to tax will begin to accrue on the unpaid taxes.
Please note, this notice is restricted to the employee portion of the social security tax. Earlier this year the Coronavirus, Aid, Relief and Economic Security Act (CARES) Act provided deferral for the employer’s portion of the social security taxes. That deferral was available for payments of the tax imposed on wages from March 27, 2020, through December 31, 2020. The IRS has released separate guidance on implementation of the CARES Act provisions.
The goal of the presidential memorandum was to increase the dollars paid to the employees per paycheck during the pandemic. Although it sounds attractive to potentially see an immediate increase in paycheck amounts, the implementing guidance reinforces the concern that there will be higher burdens for employers. Employers will be tasked with communicating to employees the deferral and the corresponding additional withholdings from January through April. Employers will also need to manage any unexpected events such as the employer and employee parting ways prior to the payment deadline. This added responsibility will need to be weighed against any benefit the employees may gain from this temporary deferral.
A copy of the IRS notice is available here.