Guidance for Implementation and Compliance with Presidential Memorandum Deferring Employee Social Security Tax Withholding
On August 8, 2020, President Trump directed the Secretary of the Treasury to allow employees to defer the payment of the employee share of payroll taxes due to COVID-19. The IRS has now issued official guidance (IRS Notice 2020-65). Unfortunately, the guidance is not very clear. We are providing a brief overview of program here. Please note that Barsamian & Moody are not tax professionals and do not provide tax or accounting services. Please consult your accountant and/or tax advisor to ensure proper compliance with tax obligations.
OVERVIEW OF THE PAYROLL TAX DEFERRAL PROGRAM:
The payroll tax deferral program allows eligible employees the option to defer the payment of their share of Social Security taxes for wages paid between September 1 and December 31, 2020. Employers are required to allow employees to participate in the program; however, employees are not required to participate. In other words, each eligible employee must be given the choice whether to “opt-in” or “opt-out” of the program. To date, there is very little guidance clarifying how employers are supposed to make this program available, what notice must be provided to employees, or whether an affirmative “opt-in” or “opt-out” is required.What employees are eligible to participate in the payroll tax deferral program?Employees who earn less than $4,000 in gross wages during a bi-weekly pay period. As the guidance is written, the limits are $2,000 in gross wages during a weekly pay period, or $4,333 gross wages for semi-monthly pay periods. In this context, the term “wages” is defined as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash,” and “compensation” is defined as “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.” Eligibility is based upon the wages and compensation paid by employers individually, this means that if an employee works at two or more entities, each employing entity must make its own determination of employee eligibility based upon only the wages paid by that entity.remuneration (including benefits) paid in any medium other than cash,” and “compensation” is defined as “any form of money remuneration paid to an individual for services rendered as an employee to one or more employers.” Eligibility is based upon the wages and compensation paid by employers individually, this means that if an employee works at two or more entities, each employing entity must make its own determination of employee eligibility based upon only the wages paid by that entity.There are payments, including disability pay, which are specifically excluded from the definition of “wages” and “compensation” under the Internal Revenue Code. Your accountant, payroll expert, or tax specialist will help you to determine what qualifies to determine eligibility for employee deferral of Social Security tax.
Is eligibility determined on a pay-period-by-pay-period basis?
Yes. Many employers have requested the IRS restrict employees to one opt-in and one opt-out for the whole four-month period, but no restriction has been established.Yes. Many employers have requested the IRS restrict employees to one opt-in and one opt-out for the whole four-month period, but no restriction has been established.
How does repayment work?
Currently, the deferral period expires on December 31, 2020, at which time the payment of deferred taxes begins. Between January 1, 2021, and April 30, 2021, the employer is required to withhold from the employees’ wages or compensation the employees’ share of the deferred taxes in addition to the taxes otherwise owed each pay period. The President has directed the Secretary of Treasury to look into eliminating the repayment obligation, but for now, it is important that employees know that they will be hit with double tax amounts next year if they defer this year.
What happens if an employee participates in the deferral program, but then no longer works for the employer during the repayment period?
Guidance provided by the IRS indicates that if withholding the deferred taxes is not an option, the employer may make other arrangements to collect the taxes from the employee. Currently, it is not clear what legal options an employer has to obtain the deferred taxes from the employee if they are no longer employed with the employer. We recommend that, as drafted in the attached proposed notice to employees, you make it clear that if the employment relationship is terminated, you retain your right to seek collection of the deferred taxes as allowable by law.If you are unable to obtain the deferred taxes from the employee, the employer will be responsible
Is the program optional or mandatory for the employer?
The IRS has confirmed that this program is optional. The IRS has further clarified that it is the employer who decides whether to participate in the tax deferral program. Because it is the employer who retains the discretion to participate the program, or not, the employer also can choose the degree to which its employees are involved in the employer’s decision to implement deferrals. If an employer elects to implement the Employee Social Security Tax Withholding Deferral Program, it is advised that the employee be provided with notice due to the significant tax burden and reduced net income the employee will experience during the first four months of 2021 absent government forgiveness of the deferred taxes. Attachment A can be used for that purpose if you decide to participate.
What are the penalties for noncompliance?
To date, there are no established penalties for noncompliance. However, this does not mean that employers should overlook this program. Employers should begin working with their payroll systems, tax specialist, accountants, and legal counsel to roll out this program.We recommend that employers provide their employees who may become eligible at any time during the four-month period with written notice advising of the deferral program and providing the option to opt-in or opt-out. A sample notice is attached. It is important to note that as more guidance becomes available, employers’ responsibilities and notice requirements are likely to change. Therefore, you should continue to consult with your tax specialist, accountant, and labor counsel.
- Internal Revenue Service: Call the Notice 2020-65 Hotline at (202) 317-5436.
- Employee Notice