On August 28th the IRS issued Notice 2020-65 providing guidance on implementation of the August 8th presidential executive order that allows the deferral of employee social security taxes for the period September 1, 2020 through December 31, 2020.
The deferral of the employee taxes is not mandatory and employers will need to decide whether they want to opt in. The potential to defer the withholding only applies with respect to employees whose gross pay for the pay period is less than $4,000 for a bi-weekly pay period (or equivalent for other payroll periods, e.g. $2,000 for weekly payroll). No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.
The notice allows employers to delay the withholding and deposit of the taxes until the period beginning January 1, 2021 and ending April 30, 2021. However, if employers choose to withhold payroll taxes for the period September 1, 2020 to December 31, 2020, the deposit requirements are unchanged. They are not allowed to hold the funds to see if Congress passes legislation to eliminate payment of the deferred tax, nor are they allowed to withhold taxes during September through December and not remit until January through April of next year.
The notice reiterates that it is the responsibility of the employer to withhold and deposit the deferred taxes. The notice does go on to provide, “If necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” This leads to the likely situation that employers will withhold regular employee payroll taxes during the period January 1, 2021 to April 30, 2021, in addition to the withholding and depositing the deferred payroll tax (resulting in a “double employee withholding” during this period).
The direct and indirect cost of putting such arrangements in place may cause many employers to choose not to participate. How much time and effort will an employer need to undertake to explain whatever “alternative arrangements” they choose to implement, to get appropriate sign-offs by affected employees, and then to explain to them in January why their withholding is now double what it was before the Executive Order?
While the guidance is welcome and provides helpful information in several areas, there are a number of unanswered questions, including:
- What happens if an individual is not employed during the repayment period?
- What happens if their wages during January through April are less than during the deferral period?
- There is no mention of the deferral applying to self-employment taxes.