The Presidential Memorandum states that the Treasury Secretary may defer the withholding, deposit, and payment of the employee’s 6.2% portion of the Social Security tax on wages (or compensation) paid 9/1/20 through 12/31/20 . . . the deferral period. It should be noted however that this deferral only applies to employees whose pre-tax wages (or compensation), payable during any bi-weekly pay period, are less than $4,000.  For pay periods other than bi-weekly, an equivalent amount is used.  Any amounts deferred under the Presidential Memorandum during the “deferral period” aren’t subject to any penalties, interest, additional amount, or addition to tax.

Note: The Presidential Memorandum specifically pertains to the deferral of the employee’s portion of the Social Security tax meaning that the employee portion of the 1.45% Medicare tax isn’t eligible for deferral. Payment of the employer’s portion of the Social Security tax was previously deferred under the CARES Act.  Employers must pay their portion of the deferred tax over the next two years, with half of the amount due by 12/31/21, and the remainder due by 12/31/22.

The Presidential Memorandum states that the deferral of the employee’s portion of the Social Security tax is made possible by §7508A. That already existing provision grants the IRS authority to postpone certain tax-related deadlines for up to one year for taxpayers affected by federally declared disasters, terrorist actions, and military action involving U.S. armed forces. Because President Trump declared (on 3/13/20) the COVID-19 pandemic to be a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, the IRS is therefore authorized to provide §7508A relief to those affected by the COVID-19 crisis. Later in the post, we will see that, employers that are required to withhold and pay the employee’s share of Social Security tax are considered taxpayers affected by COVID-19.

Note: Notice 2020-18 afforded the IRS authority under the same code section (§7508A) to postpone the due date for filing federal income tax returns and making federal income tax payments from 4/15/20 to 7/15/20. The Presidential Memorandum directs the IRS to use §7508A to provide similar relief to employers that are required to withhold, deposit, and pay the employee’s portion of the Social Security tax.

Observation: Although relief is technically given to employers, the intent as outlined in the Presidential Memorandum is to “put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.”

Although there’s uncertainty surrounding the payroll tax deferral, the IRS has provided some guidance. Here’s what we know so far.

Deferral, Not Elimination

The Presidential Memorandum directs the IRS to defer (not eliminate) the withholding, deposit, and payment of the employee’s portion of the Social Security tax. The reason the taxes cannot be eliminated, is that forgiveness of the tax would require Congressional action. In the Presidential Memorandum, this issue is acknowledge by virtue of its direction to the Treasury Secretary to “explore avenues, including legislation, to eliminate (emphasis added) the obligation to pay the taxes deferred pursuant to the implementation of this memorandum.”

Note: Representative On 9/9/20, Kevin Brady of the House Ways and Means Committee has introduced legislation (the Support for Workers, Families, and Social Security Act), that would effectively eliminate the deferred taxes by providing a temporary payroll tax holiday. At the same time, bills to block the deferral provided by the Presidential Memorandum have been introduced by other representatives. At this point, support of the legislation is uncertain, which may discourage an employer from deferring withholding.  Click Here to learn more about the Support for Workers, Families, and Social Security Act.

In implementing the Presidential Memorandum, the IRS has postponed the due date for the withholding and payment of the employee’s portion of the Social Security tax on wages (or compensation) paid during the “deferral period” (9/1/20 – 12/31/20) to the period beginning on 1/1/21 and ending on 4/30/21 (the “recoupment period”) (Notice 2020-65). Essentially, amounts deferred during the 4 month “deferral period” must be withheld and paid ratably from wages (or compensation) paid starting 4 months later during the “recoupment period”. The IRS goes on to say that, employers “may make arrangements to otherwise collect” the total applicable taxes from employees. Interest, penalties, and additions to tax will begin to accrue on unpaid amounts starting 5/1/21.

Note: The IRS has released a revised draft of Form 941 (Employer’s Quarterly Federal Tax Return) to be used for the 3rd and 4th quarters of 2020. In the draft, employers are required to report the employee Social Security tax deferral on lines 13b and 24 of the revised form. Attorneys with the IRS Office of Chief Counsel have stated that recoupment of the employee Social Security tax deferral won’t be reported on the 2021 Form 941 . It will be handled the same as the payment of the deferral of the employer’s portion of the Social Security tax under the CARES Act. Although one cannot rely on oral statements by IRS officials, they do provide some insight as to what the IRS’ position on a particular topic.) Also see the IRS Form 941 web page for additional information.

Deferral is not Mandatory

When the Presidential Memorandum was released, employers initially wondered if deferral would be mandatory? Today, it’s pretty clear that:

• deferral is optional, and
• the choice lies with the employer

Statutorily, §7508A states that the “Secretary may (emphasis added) specify a period of up to one year that may be disregarded in determining” whether certain tax-related deadlines have been met. It has been inferred from the word “may” that affected taxpayers are not forced to postpone a tax obligation . . . as evidenced by the fact that many individuals continued to pay their federal income taxes by 4/15/20 even though the revised due date was 7/15/20.

In agreement with this interpretation are IRS officials and lawmakers. The aforementioned Representative Kevin Brady has stated that the Presidential Memorandum “does not mandate deferral, nor does it outline any penalty as a result of not participating in the deferral.” In a similar vein, IRS Office of Chief Counsel attorneys have commented that the “IRS has no authority to require that employers postpone the deadline for withholding Social Security taxes.”

The Decision to Defer Employee Social Security Withholding is Up to the Employers

Notice 2020-65 specifically states that employers (not employees) are taxpayers affected by the COVID-19 emergency. As such, employers are permitted under §7508A to disregard the employee Social Security tax withholding deadline. This means that employees may not disregard the deadline without the employer’s participation. According to attorneys with the IRS Office of Chief Counsel, an employer isn’t obligated to honor an employee’s request to delay Social Security tax withholding. In addition, employers have great flexibility in determining how to implement the payroll tax deferral. They can force all eligible employees to participate, or they can require employees to consent before amounts are deferred.

Observation: Under §6205, employers are liable for Social Security taxes that they don’t withhold from employee wages and/or compensation. Threfore, if an employer defers the withholding and payment of the employee’s portion of the Social Security tax during the deferral period and does not subsequently recover the tax from the employee during the recoupment period (due to the employee in question no longer being in the employ of the employer or otherwise), it will be liable for that tax.

Employees Earning on Average >$104,000 Could Be Eligible

Earlier in the post, it was mentioned that, applicable wages (i.e., wages eligible for payroll tax deferral) are those paid 9/1/20 through 12/31/20, but only if the amount paid for a biweekly pay period is less than the threshold amount of $4,000 (roughly $104,000 per year). Notice 2020-65 clarifies that the determination of “applicable wages” are on a pay-period-by-pay-period basis irrespective of the wages or compensation paid to the employee for other pay periods. What this means is that that employees who on-average earn >$104,000 may still be potentially eligible for the payroll tax deferral. This would most likely include employees who are paid on commissions, in addition to pay periods in which overtime or bonuses are paid, or in this case not paid. You can see that this can get extremely complicated in that an employee could be eligible for deferral in one pay period, but not another. Because of this, payroll software would have to be robust enough to be able to activate and deactivate the deferral calculation as wages fluctuate.

The Word on the Street

At this stage of the proceedings, other than the federal government, it’s not looking like a great many employers are electing to defer employee social security. A recent Ernst & Young informal anonymous survey of employers to gauge their interest in the payroll tax deferral program, revealed the following. Of the 420 total responses:

• 203 employers (48.33%) indicated they wouldn’t be participating in the program
• 209 employers (49.76%) stated they were waiting on additional IRS guidance before deciding
• The remaining eight employers (1.91%) said they would pursue deferral, but not by 9/1/20.

What is Not Known

There have been a lot of questions from employers on the mechanics of the payroll tax deferral.  A great many of these have not been answered by the IRS. If you are contemplating deferral, here are the issues which you should consider:

What Happens if an Employee Resigns (or is Terminated) prior to 12/31/20?

This is arguably the most popular question for employers. As previously discussed, Notice 2020-65 requires employers to withhold and pay previously deferred amounts during the period 1/1/21 through 4/30/21. If an employee leaves the company before 1/1/21, it would likely be difficult, if not impossible, to collect the tax from such an employee, particularly those that leave on bad terms. The IRS seemingly recognizes this with their statement in Notice 2020-65 that employers “may make arrangements to otherwise collect” the total applicable taxes from the employee. What some employers are considering is:

• the collection of the tax from a final paycheck (which might include accrued vacation or other PTO), or
• having employees sign a promissory note.

Before procedures such as these are initiated, it would be prudent for employers to consult with legal counsel to ensure that they follow state wage payment laws.

Are Employers Obligated to Advise Employees as to the Availability of the Deferral?

It is generally not common practice for employers to advise employees on the tax consequences of employment-related decisions. In the case of the payroll tax deferral however, it has been noted that many employers are at least notifying their employees as to whether they’re participating in the program. If you are an employer that has elected to send such a notification to all employees, take care not to speculate on potential future action by Congress.

Can Payroll Taxes be Deferred Retroactively?

While the “deferral period” started 9/1/20, many payroll vendors were unable to update their systems to account for deferral by that date.  While there has been no guidance from the IRS in this regard, employers should assume payroll tax deferral is done on a prospective basis.

What If the Tax Is Ultimately Forgiven, and Withholding was Not Deferred?

As previously discussed, employers are afforded great flexibility in determining how to implement the payroll tax deferral. They are able to defer for certain groups of employees, or require employees to consent before amounts are deferred. What about the scenario in which employee Social Security could have been deferred, but the employee decided not to?  Or the employee didn’t even have a choice because the employer didn’t offer it?  Would there be any obligations to those employees if Congress passes legislation to permanently forgive deferred amounts? That’s a big question mark and there’s no guarantee that such a bill will ever be passed.

How Will Form W-2 Reporting Be Affected, if At All?

At present, the IRS has not made a determination as to how the employee Social Security “tax deferral” and “tax recoupment” will be reported on Form W-2. Another question that has come up is whether a Form W-2c would be required for 2020 if an employer pays the 2020 Social Security tax deferral on behalf of their employees in 2021 (i.e., through a gross-up). Again, no answer yet from the IRS on this scenario.

As employers continue to pore over the payroll tax deferral, more questions are likely. Stay tuned for further developments.  Although many employers are opting out, the decision should realistically be based on the particular facts and circumstances of the employer and its employees. The unanswered questions highlighted in this post should be a major part of the decision making process.

(This is Blog Post #894)