Payroll Tax “Holiday”

Companies that suspend collection of employees’ payroll tax would collect additional amounts from workers’ paychecks from Jan. 1 through April 30 next year to repay the tax obligation.

President Donald Trump sent a memorandum on Aug. 8 to the Treasury Department to defer collection of the employee portion of Social Security from Sept. 1 through the end of 2020.

The IRS provided guidance on August 28,2020

At just 2 1/2 double-spaced pages, Notice 2020-65 provides a minimum amount of information and leaves many questions to be answered, presumably in follow-up guidance.

IR-2020-195, August 28, 2020

WASHINGTON — The Department of Treasury and Internal Revenue Service today issued guidance (PDF) implementing the Presidential Memorandum issued on August 8, 2020, allowing employers to defer withholding and payment of the employee’s portion of the Social Security tax if the employee’s wages are below a certain amount.

Notice 2020-65, posted today on IRS.gov, makes relief available for employers and generally applies to wages paid starting September 1, 2020, through December 31, 2020.

The employee Social Security tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.

Today’s notice postpones the time for employers to withhold and pay employee Social Security taxes.

Additional tax relief related to the COVID-19 pandemic can be found on IRS.gov.

Whether to suspend withholding of employees’ payroll tax was in effect “voluntary.” Although the language of the notice is directive, it includes no penalties for noncompliance.

It remains uncertain, however, how many private-sector employers will suspend collection of their employees’ Social Security taxes, and, if they decide to do so, when they could reasonably adjust their payroll systems to stop withholding these taxes.

If employers suspend Social Security payroll tax withholding for eligible employees, the guidance does not provide for allowing individuals to opt out, which had been an administrative concern employers had raised.

Adjusting Payroll Systems

Employers that use a payroll firm should look for announcements on how the tax holiday will work, including any notices to employees. Given that many September payrolls were already processed in the closing weeks of August, before the guidance came out, many payroll companies are still considering how the tax deferral would work. 

Employers Responsible for Repaying Taxes in 2021

Employers that suspend collection of eligible employees’ Social Security payroll taxes during the four-month suspension period must repay the deferred taxes to the IRS during the first four months of 2021, unless legislation is enacted to forgive the uncollected taxes.

“Employers will need to withhold the total taxes deferred by each employee over the four-month period, employees will notice reduced net pay in 2021 equal to any increase in net pay in 2020 if they defer the tax.”

After April 30, 2021, penalties, interest and “additions to tax” will begin to accrue on employers for tax amounts that have not been repaid, according to the guidance.

White House economic advisor Larry Kudlow has said, “We will take any steps possible to forgive this deferral” so employees would not be required to pay back tax amounts deferred through Dec. 31, The Hill reported. However, doing so would require new legislation.

Democratic presidential nominee Joe Biden and other Democrats have raised concerns that if these taxes are not eventually repaid, it could imperil the Social Security fund.

Departing Employees

Employers, referred to as “affected taxpayers” in the guidance, “may make arrangements to otherwise collect the total applicable taxes from the employee,” the IRS said. 

But if an employer suspends collection of an employee’s Social Security tax—which is 6.2 percent of his or her pay—during the last four months of this year, to be repaid by doubling the employee’s Social Security tax to 12.4 percent during the first four months of 2021, for instance, what happens if an employee leaves at the end of the year?

The employer remains liable for the employee’s share of Social Security taxes; the due date is just extended to next year, according to the guidance. The employer can make repayment arrangements with the employee, such as deducting the amount owed from the final paycheck. Otherwise, the employer would have to pay the balance owed.

To suspend or defer taxes

Employers will need to evaluate whether employees would even appreciate this deferral. The additional amount being collected during the time period of repayment would mean a lesser amount of net pay then what the employee is used to—which could result in more financial stress versus the benefit the deferral may have provided.

Form 941 Revised

The IRS also released a draft version of a revised Form 941, Employer’s Quarterly Federal Tax Return, to take into account Social Security withholding that is deferred from Sept. 1 to Dec. 31. “The key change is found on page 3 … which asks for the ‘Deferred amount of the employee share of Social Security tax included in line 13b.