Apple Growth Partners

IRS Guidance on Deferment of Employee FICA

September 2, 2020

GENERAL UNDERSTANDING

What taxes are eligible for deferral under Notice 2020-65?

The deferral applies only to an employee’s share of social security tax (6.2%), where the paycheck date is between September 1st, 2020, and December 31st, 2020, and the bi-weekly pay is less than $4,000.

Who determines whether the employee portion of FICA is deferred – the employer or the employee?

The Executive Memorandum the President signed indicated that this was an employee decision and IRS Notice 2020-65 indicates that this is an employer decision. (See the Q & A #5 below discussing the employer’s option.)

The premise of the Order was to give employees more money because Congress did not take action towards a second stimulus or other relief prior to its summer recess. The Order states that Treasury “shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.” The Internal Revenue Code does not give the President the authority to require taxpayers to use the extended deadline.

Does Notice 2020-65 provide for any additional deferment for self-employment tax?

No – it applies only to an employee’s share of social security tax.

As of September 2nd, 2020, has the IRS issued any additional information, such as frequently asked questions?

As of 9:00 A.M., September 2nd, 2020, no additional guidance has been published. The payroll vendors, many trade associations and the AICPA are only a partial listing of those requesting that additional information be timely issued.

What if a pay date occurs prior to the additional guidance being issued?

Based on experience, the IRS recognizes that there was inadequate time given for software programs to be changed and for employers and employees to have all the information needed to make an informed decision. Additionally, the Form 941 and W-2 will need to be revised.

Is the deferment optional? Can you explain this conclusion?

The notice defers the due date of the withholding (and thus deposit) of the employee’s share of social security tax. Under the “Payment of Deferred Applicable Taxes” section, the notice states that an affected taxpayer (i.e. the employer) “…must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice….” The notice does not state that the withholding must be deferred, just that any amount deferred by the employer must be deposited during the 4-month period

beginning in January of 2021; therefore, indicating that any deferment is at the option of the employer. Put another way, the due date merely moved, and there is nothing in the notice preventing the employer from depositing early.

With that said – giving employers the option to defer does not appear to be in line with the underlying premise of the order by the President in the first place. As it relates to the employee’s share of social security taxes – the order intended to allow ANY employee meeting the threshold to defer his or her share of social security tax, so as to give the employee more cash during the last four months of 2020. In other words, many expected that the employee would have the option to defer, not the employer (who is merely an agent as it relates to the employee’s share of social security tax). Giving the employer the option will in many cases prevent any deferral. It should also be noted that the Notice did not clearly state that the deferral was optional – this conclusion has been inferred by the language used in the notice. Due to the confusion created by the conflict above – we expect more guidance from the IRS that will hopefully clarify their position, if they in fact intended for the deferral to be at the option of the employer.

Is it possible that the deferred social security taxes will be forgiven?

Currently, this deferral is just a very short-term, interest-free loan to the employee of 6.2% of their wage. However, the White House economic advisor has said that they will take any steps possible to forgive this deferral, but this would take new legislation from Congress. With the impending Presidential election, it’s unknown if this will be forgiven.

If the deferment doesn’t start with the initial paycheck after September 1, can we retroactively adjust the employee’s pay?

No. Under current IRS rules, it is not possible to recover any taxes that were already withheld and remitted, but that was eligible for deferral without triggering issues with employer tax filings and possibly penalties. The failure to use an available extension does not permit a retroactive change.

extension does not permit a retroactive change.

EMPLOYER/EMPLOYEE CONSIDERATIONS

We have a payroll this week; what do we do?

The IRS just released the limited guidelines on August 28th and most payroll companies are trying to get their programming setup. If you prepare your payroll inhouse, your payroll program will need updated. 

If you intend to defer the tax for your employees, you will need to wait until the programmers make the changes.

Then, as further guidance is available, we recommend having the employee sign a statement that this is a deferral, and will need repaid during 2021, and if it is an employee choice, what their election is, etc.

How do you calculate the threshold amount for each pay period if my pay period is not bi-weekly?

The threshold is defined for periods other than bi-weekly as an “equivalent” amount to the $4,000 bi-weekly amount.  Since bi-weekly is for two weeks (14 days), the weekly amount would be 2,000 (4,000 divided by 14, multiplied by 7) for 7 days. 

Bonus considerations: It is unclear at this time whether year-end or other employee bonuses will be treated as separate payments for this threshold calculation.

Social Security withholding tax is an employer responsibility, but if the employee FICA is deferred and the employee terminates, the employer is still required to remit the tax. How can the employer protect themselves?

The Notice does not address what happens when an employee terminates; other than to say the employer “may make arrangements to otherwise collect” the deferred taxes from the employee.

If the employee terminates, the employer would withhold the liability from their final paycheck (subject to certain OH withholding rules), which is hopefully large enough to cover the liability.  If not, the “former employee” still owes the balance to the employer. We understand this may be difficult getting returned. As of September 1st, there is no relief for the employer and its responsible persons. Without this relief, there is no reason that an employer would want to have the deferment.

Employees are concerned about the pay cut they will incur starting in January when the deferral has to be repaid.

While the deferment is just a timing difference, we all know how easy it is to spend the money now and forget that it will be ratably withheld in 2021. See the example below:

 8/1/2020         
Pay before deferral
9/1/2020            
Pay during deferral period
1/1/2021
Pay after deferral period
   
Weekly Pay$1,000.00$1,000.00$1,000.00 
WHT including EE FICA$250.00  $188.00$312.00 
Net Weekly Pay$750.00$812.00$688.00 

The employer/employee could elect to have the $62 of employee social security withheld as an “other after-tax deduction” so the employee’s net pay would be the same. Then, the employer would have the funds to pay the deferral starting in January and not affect the employee net pay. Also, if the employee terminates, the employer has the funds to pay the withholding. Consult with your legal counsel before implementing. The employer must not spend these funds.

But wait, isn’t the general idea that the employee has more take home during this deferral period? Of course, but perhaps the primary goal is that the employee would be in position to take advantage of any potential forgiveness of the social security taxes deferred during this four-month period. As the employer would be withholding the funds, the employee doesn’t have to worry about adjusting to the trim in net pay the first quarter of the year. If it does end up being forgiven, the employer would reimburse the employee for the funds previously withheld as an “other deduction.”

What should the employer be doing now?

As the minimal guidance issued does not address most issues and no consideration was given for time to implement, waiting is reasonable. However, you and your employees need to be aware that under current general IRS guidelines, that the deferment cannot be retroactive. Thus, any amount which has not been deferred will not be eligible should forgiveness become a reality.

Work closely with your payroll vendor, many of whom are also waiting on the additional guidance.

Communicate with your employees.

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