Submitted by Joel Shabsin, CPA
On August 8, 2020, President Trump issued a memorandum directing the Secretary of the Treasury to use his authority to defer certain payroll tax obligations to put money directly in to the pockets of American workers. The memorandum stated “The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as
applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods”.
The memorandum also stated that “The Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of the memorandum.
On August 27th, the IRS issued Notice 2020-65 entitled “Relief with respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (Covid 19) Disease 2019 Pandemic”.
The IRS Notice discusses 3 key areas.
1. The period the executive memorandum covers includes wages or compensation paid to an employee on a pay date during the period beginning on September 1, 2020 and ending on December 31, 2020
2. It reiterates and expands on the dollar threshold that was in the original memorandum. An employee is eligible to defer withholding of the 6.2% Social Security Tax from their paycheck but only if the amount of wages or compensation paid for a bi-weekly period is less than the $4,000 threshold or the equivalent for other pay periods. Since there are 26 bi-weekly pay periods in a year, the weekly threshold would be $2,000 and the
monthly payroll maximum would be $8666.67. It also states that each pay day’s wages for each employee are looked at separately and when wages or compensation for a payday is under the threshold, deferral is possible, but if the wages or compensation for that particular pay day is over the threshold, deferral is not allowed.
3. It defines the time frame and method for recovering and paying the deferred taxes. The employer is supposed to withhold and pay the total applicable taxes that an employee deferred ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Interest, penalties and additions to tax will begin to accrue on May 1, 2021 for
any unpaid deferred taxes. If necessary, the employer may make arrangements to otherwise collect the total deferred taxes from the employee.
What does this all mean?
There is nothing in the memorandum or notice requiring either the employer or the employee to participate in the tax deferral. It appears that it is strictly voluntary on the part of the employer and on the part of the employee. However, before doing any deferral, it is important that the employee understand that this is, at least at this time only a deferral and he/she will have the deferred taxes withheld from their pay, in addition to the normal Social Security taxes that would normally be withheld beginning January 1, 2021. So it’s no Social Security tax withheld from September 1 until the end of the year and a double whammy beginning January 1, 2021 unless the tax is forgiven.
Employers also have to be aware that it is their responsibility to collect the tax beginning next year and pay it to the Government. What happens if an employee with deferred taxes leaves? The IRS notice allows the employer to “make arrangements to otherwise collect the total Applicable Taxes from the employee”. The employer still must pay the deferred taxes ratably for an employee who leaves their employment before the full amount due for that employee is paid.
As an example, let’s assume employee A and his/her employer agree to defer the Social Security tax on A’s paychecks beginning with the first pay day in September. Then assume just before Christmas after working a total of 16 weeks and earning $1000 per week Employee A quits (or dies, or gets laid off, or gets sick or never shows up for work) or the business fails due to the Coronavirus restrictions placed upon it. Social taxes on $16,000 that were deferred would amount to $992. Assuming the employer is a monthly payer for payroll taxes, come February 15, 2021, the employer would have to pay $248 of deferred taxes for Employee A whether they were able to collect the tax from Employee A or not. If they can’t or don’t make the payments, they will be subject to interest, penalties and even civil penalties for non-payment of Trust fund taxes.
At this point there is no assurance that the deferred tax will be forgiven and it appears that it will take some sort of legislation from Congress to allow forgiveness. Without trying to be political, with all the infighting going on in Washington during this election year, I doubt whether or not forgiveness will be forthcoming and therefore both the employer and the employee who agree to defer taxes are at risk as outlined above. The message is to make sure your client and their employees understand what the program means to them and the risks they are taking by deferring the withholding and payment of Social Security tax.
Also, keep in mind that under the CARES Act, employers are able to defer their portion of Social Security tax until December 31, 2020 and repay ½ of the deferred amount by December 31, 2021 and the other ½ due by December 31, 2022.