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On August 8, the President signed an Executive Order called “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” that directed the Treasury Department to defer collection of employees’ Social Security taxes for the period September 1, 2020-December 31, 2020. (For an overview of the Executive Order, please refer to our previous blog.)

On August 28, the IRS issued Notice 2020-65 to provide guidance to employers about how to implement the directive.

Who is eligible for deferral?

  • Employees who earn less than $4,000 in a biweekly pay period will be eligible for the Social Security tax deferral.
  • The original Executive Order was not clear about what happens when an employee’s wages fluctuate above and below the $4,000 wage limitation. According to the new IRS guidance, if an employee’s wages are below the $4,000 limit in any biweekly pay period then the employee is eligible for deferral during that pay period.

 Employers are responsible for collecting and paying deferred taxes in the first four months of 2021

  • Between January 1, 2021 and April 30, 2021, the employer is responsible for withholding the deferred amount from employees’ paychecks and paying to the IRS.
  • All deferred amounts must be paid by April 30, 2021. Beginning May 1, 2021, the employer will face daily penalties and interest on any unpaid taxes.

Employer will be liable for uncollected taxes

  • What if an employee is terminated or doesn’t have sufficient wages that would allow the employer to collect the full amount that was deferred? The guidance says the employer “may make arrangements to otherwise collect the total Applicable Taxes from the employee” but provides no details about what this means.
  • Bottom line: the employer is ultimately liable for the employee’s share of Social Security taxes. If the employer is not able to collect the full amount an employee owes, the employer will have to pay the remaining balance.

Are employers required to defer employees’ social security tax?

  • No. Employers may opt to defer taxes for employees whose wages are less than $4,000 in a biweekly period but under the Executive Order and guidance issued by the IRS, they are not required to do so. Employers may continue to withhold and deposit Social Security taxes as usual.
  • Most employers are expected to continue to collect Social Security taxes since they will be responsible for paying any deferred taxes they were not able to collect from employees.
  • Employers are also worried that the deferral does not provide actual relief to employees as it simply creates a larger tax burden for employees during the repayment period.

Our compliance team continues to monitor new guidance, legislation and regulatory updates. We will update the Anthros blog with the latest news on COVID-19 and regulatory compliance. Please do not hesitate to reach out to us with questions.

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