Apple Growth Partners

IRS Issues Guidance to Implement Presidential Memorandum Deferring Employee Social Security Tax Withholding

August 31, 2020

Earlier this month the President issued an order to the Secretary of the Treasury directing the Secretary to postpone the collection of the employee’s share of social security tax for certain wages. Specifically, the order provided that the collection of the social security taxes for wages paid between September 1, 2020 and December 31, 2020 was to be deferred without any penalties or interest for employees whose wages during any bi-weekly pay period is generally less than $4,000. Since employers are required by law to withhold these taxes –  but the order was directed at the Treasury – concern as to if and how to implement the order had been increasing daily as the September 1st date approaches.
 
On Friday, just days before September 1st, the IRS issued Notice 2020-65 which provides guidance to employers on how to implement the President’s order. 
 
Below is a summary of the notice:

  • For wages meeting the conditions below, the notice defers the normal due date for the withholding and deposit of the employee’s share of social security tax (6.2%) on those wages. Unless the employer is otherwise deferring their share of social security tax under the CARES Act, the employer would still remit their share of the social security tax.
  • Employers must withhold and pay the taxes deferred above ratably from wages paid between January 1, 2021 and April 30, 2021. If necessary, the employer may make arrangements to otherwise collect the total taxes from the employee.
  • The deferral applies to wages that meet all of the following conditions:
    • Social security wages for a pay period where the pay date is between September 1, 2020 and December 31, 2020. So the actual wage payment date is controlling.
    • Social security wages for the bi-weekly (i.e. two week) pay period are less than the threshold amount of $4,000. If the employer does not pay their employees on a bi-weekly basis, the threshold amount is an equivalent amount, presumably determined on a days basis, or about $285.71 per day. Hence, if the pay period is 1 week – the threshold amount would be $2,000 for that pay period.
    • Each pay date and corresponding pay period is separate from another pay date and corresponding period. Thus, one pay date (and corresponding pay period) may qualify for the deferral while another may not. The order used the term “generally” – but in the IRS guidance it is clear that the $4,000 threshold is on a mechanical pay period-by-pay period basis.

 
Despite the guidance, a number of questions still remain – such as  (1) the extent to which the employer and employee can agree to disregard the deferral, (2) treatment of employee terminations during the deferral or repayment period and (3) the effect on the employee’s quarter of coverage for social security taxes, to name a few. Employers should also keep in mind that while the deposit obligation is also deferred until the date withheld (which would begin in January of 2021), they may want to set aside their own funds to protect themselves against possible penalties. Given the number of issues still to be resolved, more guidance should be forthcoming.

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