Client Alert: Issues Abound in Employee Payroll Tax Deferral
Date: September 2, 2020
Numerous employers, payroll, tax, and accounting professionals and others have raised a variety of questions about implementing the Memorandum, some of which are addressed, briefly, by Treasury in Notice 2020-65 (the “Notice”), issued on August 28, 2020. Nevertheless, as discussed below, many issues and questions remain.
Scope of Deferral and Eligibility
The Memorandum calls for a deferral, but not forgiveness, of the employees’ portion of the Social Security tax, equal to 6.2% of wages up to $137,700 for 2020. Employers are still required to withhold and remit the employee portion of the Medicare tax as well as the employers’ share of the Social Security tax (unless deferred under the CARES Act, as modified by the Paycheck Protection Program Flexibility Act). At the time the President issued the Memorandum, he called on the Secretary of Treasury to “explore avenues” including Congressional legislation, to “eliminate the obligation to pay the taxes deferred” (i.e., forgive the amounts). Congress has not yet done so, meaning that, at least as of the date of this Client Alert, amounts deferred will ultimately need to be repaid.
The Notice allows—but does not require—an employer to defer the withholding and payment of its employees’ share of Social Security tax on wages paid during the period of September 1, 2020, through December 31, 2020, for employees earning below a threshold amount equal to $4,000 paid for a bi-weekly pay period (or the equivalent threshold amount with respect to other pay periods). For other pay periods, the threshold amounts appear to be:
- Weekly pay-period: wages of less than $2,000
- Biweekly pay-period: wages of less than $4,000
- Bimonthly pay-period: wages of less than $4,333
- Monthly pay-period: wages of less than $8,666
The Notice clarifies that the determination of whether wages are eligible for deferral (“Applicable Wages”) is made on a pay period-by-pay period basis. As a result, if the amount of wages or compensation payable to an employee for a bi-weekly pay period is less than $4,000 (or the corresponding pay period threshold amount for pay periods other than bi-weekly), then that amount is considered Applicable Wages for the pay period and Social Security tax may be deferred on those wages, regardless of the amount of wages or compensation paid to the employee for other pay periods.
Repayment of Deferred Taxes
The Notice provides that an employer must withhold and pay the deferred taxes ratably from wages paid during the period from January 1, 2021, through April 30, 2021. However, according to the Notice, an employer may make “alternative arrangements” to collect the taxes from the employee if necessary. Therefore, employees benefiting from the deferral may have additional payroll taxes withheld during that four-month period in 2021. If the applicable taxes are not fully repaid by April 30, 2021, per the Notice, interest and penalties and additions to tax will accrue as liabilities of the employer starting on May 1, 2021.
Issues to Consider and Unanswered Questions
Employers who plan to defer Social Security tax withholding from employees, should consider that:
- Additional withholding in the future, as required by the Notice, may require employee consent under state and local labor laws, collective bargaining agreements and other restrictions on deducting amounts from employee wages.
- It is unclear whether individual employees can opt out of their employer’s choice to defer collection of employee portion of Social Security taxes.
- If the employer ultimately pays the deferred taxes, that payment would appear to be taxable income to the employee.
- For employees who remain employed into 2021, the double withholding of employee-share Social Security tax until the 2020 deferral is repaid may create a financial hardship.
Other issues include:
- What arrangement can the employer make to collect the deferred taxes from employees who are no longer on payroll?
- Has the employer’s payroll processor established procedures for implementing deferral? If the employer handles payroll in-house, what processes needed to be updated?
- How will a deferral affect existing credits under the CARES Act and other coronavirus-related programs?
WTP’s Take
In some respects, this program creates a short-term interest free loan from the IRS to certain employees, capped at about $2,149 (the maximum amount eligible for deferral), guaranteed by the employer.
Given the uncertainty of this program, the likely additional burden to employees to repay the deferred withholding, and the risk to employers who may have to pay additional taxes to the IRS themselves if they cannot withhold those amounts from employee wages, we caution that employers should speak with their WTP attorneys and/or other advisors if they are considering deferring withholding of their employees’ Social Security tax payments.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.