IRS, Treasury Issue Guidance on Social Security Tax Deferral

Late Friday, August 28, 2020, the IRS issued guidance on the repayment of deferred employee Social Security taxes under the Executive Order signed earlier August 8, 2020. In mid-August, Treasury Secretary Mnuchin stated that the deferral is voluntary and that employers may continue to withhold and deposit employee Social Security taxes in accordance with their normal schedule. As late as Friday night, the Treasury issued a statement saying that the Order allows employers to defer the taxes. Employers still have questions.

First, Employers Council recommends you discuss this with your organization’s tax advisor as to whether this deferral is required or not, and whether it benefits your organization and your employees.

If you decide to partake in the tax deferral, there are a few things to know:

  • It applies to wages paid starting on September 1, 2020, not wages earned. In other words, any paycheck dated September 1, 2020, through December 31, 2020, is covered.
  • Employers can defer withholding, deposit, and payment of employee’s portion of SS (OASDI) taxes for periods between September 1, 2020, and December 31, 2020.
  • Deferrals apply to employees making under $4,000 in pre-tax wages or compensation in each bi-weekly pay period. Note this is figured on a pay period by pay period basis, which means an employee could qualify one pay period and not the next due to fluctuations in pay, like overtime.
  • The deferred amounts must be collected between January 1, 2021, and April 30, 2021. If the entire amount is not recouped by May 1, 2021, interest and penalties will ensue.
  • Employers can make “arrangements” to collect the total tax due from employees. No detail is provided on what “arrangements” may be.
  • There are still administrative questions, which were not addressed. For example, it appears to require deferral for all employees, rather than allowing individual employees to opt out. What measures can an employer take if an employee leaves during the last quarter of the year who has deferred taxes?

Employers should also consider that for bi-weekly pay periods, the deferral period may be nine paychecks, where the payback period may be eight paychecks, meaning employers will need to withhold more than double from employees in the first quarter next year to avoid penalties.

Again, consult your tax advisor before making this decision.