Minimal Guidance Issued on Deferral of Social Security
On August 8, 2020, President Donald Trump issued the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” The order directed the U.S. Department of Treasury to issue guidance to implement this memorandum. The intent of the order allows for an election to defer the withholding, deposit, and payment of the tax imposed on the employee portion of the Social Security tax of 6.2 percent.
On Friday, August 28, 2020, the U.S Treasury and the IRS issued Notice 2020-65 that provided a limited amount of guidance in relation to the Executive Order. The Guidance letter provide answers to a few items; however, several important questions remain. Further guidance from the IRS is expected and required before the deferral can be implemented.
Here are some key points on the Memorandum and the initial Guidance Letter:
- The deferral program is voluntary for employers and employees. Most employers are not participating.
- Employers are NOT required to defer employee Social Security taxes due to the risk, uncertainty and complexity of the program. Treasury Secretary Steven Mnuchin has described the program as optional for employers.
- The Treasury confirmed the employer is responsible to withhold and pay back any deferred taxes, plus interest, penalties, and additions to tax, if the employer elects to participate in the program.
- The memorandum only temporarily defers the collection and does not forgive any tax amounts. The House of Representatives, the Senate, and the President would have to agree and pass new legislation forgiving any deferred taxes.
- The guidance allows an option to defer employee Social Security tax at 6.2 percent until December 31, 2020. It does not affect Medicare or Federal Income Withholding taxes.
- The deferral is only available to employee’s taxable wages or compensation less than $4,000, during a bi-weekly pay period ($2,000 weekly) calculated on a pre-tax basis, or the equivalent amount with respect to other pay cycles.
- If an employee defers, then the employee will receive less in their paycheck starting January 2021 in order to repay any deferred taxes. The employee must repay the deferred tax amounts starting January 01, 2021 and the entire amount must be collected by April 30, 2021.
- If an employee does not have enough to cover the deferred amount, has a leave of absence, a reduction in hours, or terminates employment, the employer is ultimately responsible to pay the taxes.
- The guidance notice states: “if necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.”
- It is currently unclear if the remaining amount can be withheld on an employee’s final paycheck. The guidance does not provide any further information on how an employer may otherwise collect unpaid Applicable Taxes from an employee. Many state laws prohibit substantial reductions on an employee’s final paycheck.
Further Guidance is expected from the IRS and Treasury.
- The current guidance issued raises more questions than it answers about the administration of this deferral. The current guidance does not provide critical information needed to complete programming for tracking or reporting purposes.
- The IRS has not yet issued guidance for the reporting requirements associated with the deferral. Programming cannot be completed until guidance is issued on how the deferred taxes will be reported on future tax returns and the employee’s Form W2.
- Many employees may prefer that taxes not be deferred for a few months and then have a reduced income a few months later in order to repay the deferral.
- The Treasury Notice does not indicate how companies should administer the election process and track which employees do and do not elect to participate in the program or how the deferral is reported on future tax returns, such as the Form W2 or personal tax returns.
- Employers that allow the deferral will need to track employees and maintain participation forms and additional records. Employees should be provided with a detailed explanation of the program and a deferral “opt-in” form to keep for their records.
Any employer should consult with an employment or tax attorney prior to participating in the deferral of statutory employment withholding taxes. The California Payroll team will continue to monitor legislative measures and provide more information as it becomes available.
Legal Disclaimer: California Payroll is not engaged in the practice of law, accounting, or HR counsel. The content in this email should not be considered as legal or accounting advice. If you have legal questions concerning your situation on the information you have obtained, you should consult with a licensed professional, CPA or Attorney.