IRS issues guidance on employee Social Security tax deferral

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IRS issues guidance on employee Social Security tax deferral

By: Dean Dorton | August 31, 2020

The IRS has issued guidance on President Trump's Executive Order to defer employee Social Security taxes. We have summarized the key points of the IRS guidance below.

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On Friday, August 28, the IRS issued Notice 2020-65, which provides guidance on President Trump’s Executive Order directing Treasury to defer the withholding, deposit, and payment of certain employee payroll taxes. While the Notice provides some clarity, questions remain. For a discussion of the initial Order, click here.

In this article, we break down what’s new in the latest IRS guidance.

A Due Date for the Deferred Taxes

As a reminder, the President’s Order instructed Treasury to issue guidance deferring the withholding, deposit, and payment of the employee’s share of Social Security taxes (6.2% of annual wages and compensation up to $137,700) in certain circumstances. The President’s Order directed Treasury to defer these taxes, meaning absent further action, the taxes will be due eventually. Notice 2020-65 sets that due date. Under the Notice, the deferred taxes are due on a pro-rata basis beginning on January 1, 2021, and ending on April 30, 2021.

Determining “Applicable Wages”

The deferral applies to wages and compensation paid to an employee on a pay date between September 1, 2020, and December 31, 2020, if the amount of such wages or compensation paid for a bi-weekly pay period is less than $4,000, or the equivalent amount for other pay periods. The Notice clarifies that “Applicable Wages” are determined on a pre-tax, pay period-by-pay period basis. This means that if the wages payable to an employee for a pay period are less than the threshold amount, then the wages are considered “Applicable Wages” eligible for the tax deferral for that pay period, regardless of the amount of wages paid to the employee for other pay periods. For example, assume an employee who is paid bi-weekly has wages of $3,000 for the pay period ending September 5 and wages of $5,000 for the pay period ending September 19. The wages paid for the period ending September 5 qualify as “Applicable Wages” even though the wages paid for the period ending September 19 do not.

Method for Paying the Deferred Taxes

The Notice states that employers must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, for any deferred taxes that have not been paid by that date.

This means that employees whose taxes are deferred may see a bigger paycheck this fall, but it could create a hardship on employees in early 2021 by requiring employers to withhold twice as much Social Security tax from the employees’ wages. In addition, while the Notice states that employers “may make arrangements” to collect the deferred taxes from employees, it does not provide guidance on how to handle employees who are no longer on the payroll on January 1.

We will continue to keep you informed of any significant developments.

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