IRS Issues Limited Additional Guidance Regarding Optional Deferral of Employee Social Security Taxes

August 31, 2020

Kaylyn Varnum, CPA
Mike Batts, CPA

Late on Friday, August 28, 2020, the IRS issued Notice 2020-65 (“the Notice”) providing limited additional guidance in connection with the implementation of the deferral of the employee portion of Social Security taxes on certain wages or compensation paid from September 1, 2020 through December 31, 2020.  The Notice was issued in response to President Trump’s  Memorandum (summarized in our prior Special Alert, accessible here) on August 8, which instructed the Treasury Secretary to provide guidance to implement the deferral.

The Notice allows employers to defer withholding and payment of the employee portion of Social Security taxes (on eligible wages) for compensation paid from September 1, 2020 through December 31, 2020…and requires employers to withhold and pay the taxes deferred evenly during the period of January 1, 2021 through April 30, 2021.  Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Social Security taxes.

We note that the withholding for the deferred taxes in early 2021 will be in addition to the regular employee portion of Social Security taxes that must be withheld from employees’ pay for their compensation during the period of January 1, 2021 through April 30, 2021.  For employees of employers who choose to defer withholding and payment of these Social Security taxes, the result will be that the employees will have less withheld than usual from their pay during the period from September 1, 2020 through December 31, 2020, and more withheld than usual from their pay from January 1, 2021 through April 30, 2021.

As outlined in our prior Alert, in order to be eligible to take advantage of the deferral, the employee’s wages or compensation payable during any biweekly pay period must generally be less than $4,000, calculated on a pretax basis (or the equivalent amount with respect to pay periods other than biweekly). Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.  The Notice clarifies that the eligibility evaluation is made on a pay-period-by-pay-period basis.  That is, wages for any pay period in which an employee’s wages or compensation fall below the threshold would be eligible wages, and wages for any pay period in which the employee’s wages or compensation exceed the threshold would be ineligible for the deferral provision outlined above.

Although not specifically addressed in the Notice, it appears, based on the language on the IRS website and in commentary made by Treasury Secretary Mnuchin, that participation in the deferral provision outlined above is optional. (The IRS website refers to the Presidential Memorandum as “allowing” deferral of the taxes.)

A number of questions remain based on the currently available guidance.  For example, it is unclear as to whether an employer can defer the withholding and payment of employee Social Security taxes selectively (only for certain employees and not others).  Presumably, an employer could implement the provision selectively.

For some employees, a deferral of employee Social Security taxes could cause hardship upon repayment of the taxes in the first quarter of 2021.  Although President Trump has indicated it is his hope that Congress would pass legislation to effectively forgive the deferred taxes, such legislation is certainly not guaranteed.   In the event that Congress were to pass such legislation, it is possible that the forgiveness provision would apply to all eligible wages, regardless of whether the employer deferred the Social Security taxes or not (though such treatment is not guaranteed).

Another possible challenge associated with the deferral is what an employer is required to do in the event it defers withholding the taxes for an employee in late 2020, and the employee terminates employment before the employer is able to withhold the taxes in 2021.  The Notice addresses this possibility sparsely, stating, “If necessary, the Affected Taxpayer [referring to the employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.”

Because of the lack of clear guidance in connection with the implementation of the deferral provision, the administrative burden and potential challenges associated with implementation, the potential adverse economic impact on employees, and the uncertainty regarding ultimate forgiveness of the deferred taxes, BMWL recommends that employers not participate in the deferral of withholding and paying employee Social Security taxes, which we interpret as being optional.  We acknowledge that it is possible that Congress could ultimately pass legislation forgiving only the taxes that were deferred, and that would be advantageous only for employees whose employers chose to defer withholding the taxes.

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