Late on the afternoon of August 28, the IRS and U.S. Treasury released Notice 2020-65, providing limited guidance surrounding deferral of the required 6.2% employee Social Security tax withholding. The Notice leaves a number of important questions unanswered.
Crucially, for impacted employees, this program is only a temporary tax deferral and not a permanent tax cut. The guidance only delays the required withholding of Social Security tax from wages paid during the period from September 1 through December 31, 2020; the deferred tax will need to be withheld from employee compensation paid from January 1 through April 30, 2021. This temporary deferral will then double the Social Security taxes required to be withheld from employees during the first four months of 2021 from 6.2% to 12.4%.
While not specifically stated, it appears the withholding deferral is elective. Language in the press release accompanying the Notice explains that it is “allowing employers to defer” the withholding; it does not provide that employers are required to defer. Further, it notes that deferral “may apply” and does not provide that it will apply. As reference, the president does not have the authority to change the underlying law requiring withholding, only the power to direct the Secretary of the Treasury to use his authority granted under section 7508A of the Internal Revenue Code to defer withholding and deposit of the withholding taxes.
The notice also does not give any indication that employees have a say in the election, providing only that “today’s notice postpones the time for employers to withhold and pay employee Social Security taxes.” Providing each individual with the ability to make an election would likely create a large compliance burden on employers.
The notice does not specifically provide how withholding will occur if the employee is no longer working for the employer after the deferral period ends December 31. Nor does it address whether the employer would be required to make up the difference, providing only that “if necessary, the Affected Taxpayer (the employer) may make arrangements to otherwise collect the Applicable Taxes from the employee.” This language implies potentially increased compliance burdens on employers related to the collection of tax from former employees. Plus, for amounts unpaid beginning May 1, 2020, additional taxes, penalties and interest apply. The notice does not indicate if these additions could be passed on to employees or former employees, but the deposit obligation is on the employer.
Deferral only applies on biweekly wages under a $4,000 threshold amount during that particular pay period. Likely, though unstated, similar pro rata threshold amounts would apply for pay periods other than biweekly. Further, deferral does not absolutely need to begin September 1; each pay period is considered separately. Employers deciding to move forward with deferral still appear to have time to adjust their payroll systems.
Finally, there’s been much discussion about whether the deferred tax would ultimately be forgiven. Congress would need to take action for such clemency to be allowed, and given the current political climate, there’s no assurance such legislation would pass.
Additionally, there could be potential risk for employees for whom the deferral election was not made, if and when Congress does enact some form of forgiveness. For example, would an employee be able to defer future taxes or be able to claim a refund under such future legislation?
On the employer side, and given our litigious environment, would employees try to hold employers liable for not electing to defer if refunds or future deferral is not available but Congress provides a forgiveness for current deferrals as allowed under current guidance?
Interesting questions during interesting times. Employers should consider clearly communicating their decision, either way, to employees.
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