By: Barry K. Jones
On August 8, 2020, President Trump issued a Presidential Memorandum (“Memo”) directing the Secretary of the Treasury to use his authority pursuant to Section 7508A of the Internal Revenue Code (Code) to defer the withholding, deposit, and payment of certain payroll tax obligations consisting of the employee's portion of Social Security taxes. Under the Memo, the payroll tax deferral applies to individuals (but not sole proprietors and those who pay self-employment tax) with wages that are less than a bi-weekly threshold of $4,000. The deferral creates an administrative difficulty since the employer must calculate the dollar threshold each pay period.
The deferral of payroll tax relates only to the 6.2% OASDI (old-age survivor and disability insurance) tax, which is capped at $137,700 of wages received in 2020. The deferral does not apply to the 1.45% Medicare tax which is assessed even on wages exceeding $137,700 (increased to 2.35% on wages above $200,000).
On August 28, 2020 the Treasury Department issued Notice 2020-65, providing guidance on the application of the Social Security deferral (“Notice”). The Notice permits employers not to withhold payroll taxes for the period starting September 1, 2020 and ending December 31, 2020, and extends the deadline to withhold and remit such payroll taxes to April 30, 2021. In addition, the Notice clarifies that employers are responsible for withholding and paying back any deferred taxes
The Notice is clear that it is the responsibility of the Employer to remit any deferred amounts prior to April 30, 2021. Specifically, the Notice states that "An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes." The Notice defines Affected Taxpayers as employers.
There are still many questions that need to be clarified. While the Notice makes clear that "Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee," the Notice does not address what happens in the case of employees who terminate employment prior to the due date of the deferred amounts. Will the employer as the Affected Taxpayer be responsible? It appears such a conclusion is possible.
The “tax holiday” had an effective date of September 1, 2020, therefore employers must make a decision regarding their participation in the deferral of these taxes. However, with the Notice not being published until late on August 28th, many employers have not had time to make such a decision. No matter what an employer decides, communication is going to be important. If an employer decides to participate, the employer should communicate the terms of the deferral to employees. Employees must understand that, while they will not pay Social Security taxes for the rest of 2020, they will have to pay double in the beginning of 2021.