On Friday, August 28th, the IRS and Treasury released Notice 2020-65 which provides guidance on implementing the Presidential Memorandum issued on August 8th. That Executive Order allows employers to defer withholding and payment of employees’ portion of Social Security tax.
While much remains unclear, the IRS Notice does provide some clarification. Here are the key takeaways:
- Employers may defer the withholding and payment of the employees’ share of Social Security tax that would have been due between September 1, 2020 and December 31, 2020. The notice defines applicable wages and provides income thresholds indicating who qualifies for the deferment of these withholdings. It also specifies that deferment of these withholdings should be evaluated on a pay-period by pay-period basis.
- The repayment period is January 1, 2021 through April 30, 2021 for employers who choose to defer the withholding of these taxes. After this time, interest, penalties and additional taxes could apply to amounts that have not been repaid.
In summary, based on what we know now, the decision not to withhold Social Security tax from the employee is the employers’ decision; the employer must withhold and pay the total deferred tax under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Further, the employer has the right to recover the deferred tax from the employee if the employee is no longer employed.
This program may be advantageous to employees, but only if Congress acts to forgive the tax. Based on what we know now, the employee will have to pay back the deferred tax to the Treasury in the first four months of 2021 and the employer will be liable for the tax if the employee is not employed or if the employer did not withhold the unpaid tax on the employee’s final paycheck. Accordingly, we are recommending that employers’ do NOT defer the withholding of the employees share of the Social Security tax until more guidance is issued that protects the employer.
As with all legislation pertaining to the pandemic, we’re watching this closely and will share details as they become available. If you have any questions, please reach out to your LGA team member.
by Steve Gallant, CPA