On Saturday, August 8, 2020, the president signed a memorandum directing the secretary of the treasury to defer withholding, deposit, and payment of employee Social Security payroll tax obligations for certain wages or compensation paid between September 1, 2020, and December 31, 2020. The memorandum does not include deferral of employee Medicare tax or any employer payroll taxes.
August 8 Presidential Memorandum
Designed to allow working Americans to keep more of their pay during the economic challenges presented by the COVID-19 pandemic, the memorandum left employers in the dark about how to implement the tax deferral.
- Are employees required to opt-in or opt-out to the Social Security tax deferral? Is there a form required to do so?
- Are employers required to cease withholding Social Security taxes from worker wages?
- Will employers be responsible for paying the deferred tax once it is due?
- Will the Treasury eventually forgive the deferred tax altogether?
- If deferrals begin after September 1, will the employer be required to adjust prior payrolls?
- Will changes to Forms W-2 and 941 be required?
As September 1 approached, employers awaited guidance from the IRS on how to proceed. Likewise, payroll organizations and the American Payroll Association closely watched for guidance so they could advise clients and program systems to accommodate the directive. The National Payroll Reporting Consortium (NPRC), a non-profit trade association of organizations that provide payroll processing and employment tax services directly to employers, and the American Payroll Association sent a letter to individuals at the Treasury and the IRS on August 14 with recommendations for what guidance to provide.
August 28 IRS and Treasury Guidance
On August 28, 2020, the IRS and the Department of Treasury released their guidance for implementing the presidential memorandum. The brief guidance document makes clear the following:
- Employers required to withhold Social Security tax are affected by the COVID-19 emergency for purposes of the relief outlined in the memorandum.
- Employers must withhold and pay the deferred Social Security tax during the period of January 1, 2021, to April 30, 2021. Employers can make other arrangements to collect the deferred taxes if necessary.
- Interest and penalties will begin to accrue on May 1, 2021, for any unpaid deferred taxes.
- Applicable wages are those with a pay date (check date, not pay period) of September 1, 2020, through December 31, 2020, but only when wages for a biweekly pay period are less than $4,000.
- Determination of applicable wages is made on a pay period basis, and therefore eligibility for Social Security tax deferral could change for some employees from pay date to pay date.
There remain unanswered questions for employers, such as how to handle the deferred tax obligation for employees who leave the company or for new employees who began deferring Social Security tax with a previous employer. What happens if the employer is not able to collect the deferred taxes from the employee? Will the employer face penalties?
There is speculation that the deferred tax will be forgiven, but that will be up to Congress, and in the meantime, employers must proceed as if the deferred taxes will be due next year as outlined in the guidance document.
September 3 IRS Confirmation Deferral is Optional
One big question for employers may now be cleared up. In August, Treasury Secretary, Steven Mnuchin, said the deferral was voluntary for employers, even though the memorandum and official guidance did not address this. Since then, Lexology and Bloomberg Tax have reported that IRS attorney Kelly Morrison-Lee confirmed employers are not required to offer the deferral to employees. That takes some of the pressure off employers who were concerned about how to implement the deferral and coordinate repayment next year.
Employers should understand their employees’ needs as part of the decision process: for some, the temporary tax savings won’t be worth the hassle of repayment in 2021, and for others, the savings can offer much-needed financial relief for the remainder of the year. Additionally, gathering information from legal and tax professionals can help employers make the best-informed decision for the business and minimize risk. Ultimately, the decision of whether to continue withholding employee Social Security tax or not and how to navigate the uncertainty lies with employers.
- Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster
- NPRC and APA Offer Recommendations to Treasury and IRS re Social Security Tax Deferrals
- SHRM: Actions on Payroll Taxes and Unemployment Benefits Promise Relief, Raise Questions
- IRS and Department of Treasury: Guidance issued to implement Presidential Memorandum deferring certain employee Social Security tax withholding
This HR News post was updated on September 2, 2020, to include the August 28 IRS and Department of Treasury guidance, and on September 14, 2020, to include the Lexology and Bloomberg Tax reporting.