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Additional Guidance Released on Social Security Tax Deferral, but Questions Remain

Posted 5:15 PM by

Earlier this month, President Trump signed an executive action directing the Secretary of the Treasury to defer collection of the employee portion of the Social Security tax (6.2%). The executive action stated that the Secretary of the Treasury would issue guidance needed for implementation. On Friday, Aug. 28, the U.S. Treasury Department and Internal Revenue Service (IRS) issued this first piece of guidance via Notice 2020-65.

The notice provides that all employers required to withhold and pay the employee share of the Social Security tax are “affected taxpayers” for purposes of the executive action. The requirement to withhold and pay the employee share of Social Security tax with respect to applicable wages will be postponed until the period beginning Jan. 1, 2021, and ending April 30, 2021. Applicable wages are wages paid to an employee on pay dates from Sept. 1, 2020, through Dec. 31, 2020, but only if the wages are less than $4,000 for a bi-weekly pay period (or the equivalent threshold amount with respect to other pay periods). This determination is made on a pay-period-by-pay-period basis. The threshold amount is determined for each pay period without regard to the amount of wages paid to the employee for any other pay period.

Employers that defer collection and remittance pursuant to this executive action will be required to withhold and pay the deferred Social Security taxes ratably from wages paid between Jan. 1, 2021, and April 30, 2021, or interest, penalties, and additions to tax will begin to accrue May 1, 2021. The withholding of the deferred Social Security taxes will be in addition to any current withholdings that will still be required with respect to the pay periods from Jan. 1, 2021, through April 30, 2021.

This directive leads to a critical question that employers must consider: What if there are not enough wages paid to a particular employee during this period to allow the employer to withhold the deferred Social Security taxes? For example, what if employees are terminated, or hourly employees have had wages reduced during these pay periods?

Although the guidance is unclear, it is possible that employers will remain responsible to pay the deferred taxes whether they are able to withhold them from employee wages or not. The notice simply states that employers “may make arrangements to otherwise collect” the deferred Social Security taxes from the employee. The notice does not provide any details for what constitutes such an arrangement or how to ensure that employers will not have to pay out-of-pocket for the deferred employee Social Security taxes.

Another critical question that remains is whether or not employers are obligated to defer withholding and payment of employee Social Security taxes on all applicable wages during this period. The executive action and Notice 2020-65 are both vague with respect to voluntary versus mandatory application of the deferral order. However, the U.S. Treasury Department’s press release announcing the notice states that this guidance “allows” employers to defer certain payroll taxes. The press release also states that deferral “is available” with respect to any wages that fall below the threshold amount. This language at least implies that compliance with this executive action may be voluntary. Furthermore, Treasury Secretary Steven Mnuchin has made public comments suggesting that compliance would be voluntary, but clear guidance has not been provided.

If you have questions, please reach out to your KSM advisor or complete this form.

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