Employers have been awaiting Treasury guidance on the Presidential Memorandum issued on August 8, 2020. The guidance provided for the deferral of the Social Security tax withholding from employees for the period of September 1, 2020 to December 31, 2020.
The Social Security tax withheld from an employee is equal to 6.2% of wages subject to the tax. The employer required match for this tax is not subject to the memorandum and must still be remitted timely.
We provide a summary of the guidance issued on August 28, 2020 reflected in Notice 20-65.
The presidential memorandum may be summarized as follows:
The Secretary of the Treasury is hereby directed to use his authority pursuant to 26 U.S.C. 7508A to defer the withholding, deposit, and payment of the tax imposed by 26 U.S.C. 3101(a), and so much of the tax imposed by 26 U.S.C. 3201 as is attributable to the rate in effect under 26 U.S.C. 3101(a), on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020.
The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.
Problems with Implementation
Employers and employer groups were concerned with the implementation of this order for several reasons:
- Payroll tax withholding and deposit obligations are subject to significant penalties and interest for failure to comply (and include trust fund recovery penalties applicable to control persons).
- Only Congress can forgive taxes. What happens if the taxes are not forgiven? Who is responsible for repayment (the employer or the employee)?
- This memorandum is not a suspension of the tax. It is a deferral. Some employees are eligible and some are not. Programming to make these changes in payroll tax software takes time.
- The deferral is be available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. Well, if your company is not on a bi-weekly pay period, you have to figure for each employee anywhere near this limit whether they qualify.
- Will it just make matters worse when employees have to pay this back?
- Are employers supposed to let each employee decide to participate or should they just force all employees to participate?
Guidance in Notice 20-65
Applicable Wages means wages (all remuneration for employment with a few specific exceptions) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. The determination of Applicable Wages is made on a pay period-by-pay period basis.
Just a reminder, the Applicable Wages refers to the deferral of collecting the Social Security tax from this definition of Applicable Wages
So, the notice does clarify that payroll software will need to be programmed to compute an equivalent limit for the bi-weekly payroll cap of $4,000. It also clarifies that an employee may be eligible for deferral in one pay period, but necessarily in all pay periods (this applies mainly to employees with variable compensation).
Repayment of Deferred Taxes
The employer must withhold and pay the total taxes that the employer 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 taxes. If necessary, the employer may make arrangements to otherwise collect the total Applicable Taxes from the employee.
So, the notice clarifies that the tax must be repaid. And, yes, the employer can collect the tax deferred from the employee, but it must be noted that during the period of repayment, the employer will not only be collecting back taxes that were deferred, but will also be collecting current Social Security taxes that are due.
This creates several problems:
- What recourse does the employer have if the employee terminates employment?
- Will employees have the cash flow they need with both current and back payroll taxes being currently collected?
- Software will once again need to be re-programmed to process these garnishments.
- The amounts due for each employee must be tracked.
Most importantly, the notice makes it clear that the employer is responsible for repayment, and the penalties and interest begin May 1, 2021.
We suggest that you consider the administrative problems with implementing the payroll tax deferral in your business before deciding to participate. It appears that many businesses will decline to participate.
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