August 8, 2020, President Donald Trump prepared a presidential memorandum (Notice 2020-65) to defer withholding affected compensation for employees during September-December 2020, and then those deferred amounts paid starting January 1 and ending April 30, 2021. This includes the employee portion of the following: the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201, and the deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000.
IRS Guidance was released on August 28, 2020, 3 days before the September 1, 2020 start date of the memorandum, with an explanation of what this means for employer. From that, it is unclear whether employers will choose to pursue this deferment or not, due to a large number of unanswered questions.
Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement.
To be clear, no deferral is available for any payment to an employee of taxable wages of $2,000 weekly pay period or $4,000 per semi-monthly pay period. It is not a deferral “up to” that amount with no relief for the overages. Rather, the deferral only applies to workers under the income threshold. For those qualifying workers, the deferral applies to the employee’s portion of Social Security taxes.
If the deposit obligation for employee social security tax does not arise until the tax is withheld, as long as the employer isn’t withholding the tax on behalf of the employees, the employer doesn’t have to make a deposit to the IRS during the deferral period. The employer is the one responsible for planning to collect the applicable taxes from the employee.
If the employee leaves the company before the taxes have been fully collected or does not make enough to pay back the taxes in 2021 to be lower than minimum wage, there’s no clarity on behalf of the IRS explanation currently or whether the employer or the employee would be responsible for the unpaid amounts.
The employer is who determines if they choose to pursue this option or not of the social security tax deferral, because if the employee leaves before the taxes are repaid, the employer may be responsible for the unpaid taxes because the IRS guidance DOES NOT allow them to withhold the tax as a retainer and defer paying it for a later amount. Nor does it give the employer the ability to gross-up the amount as additional wages after-the-fact when an employee leaves before the tax debt has been satisfied.
Dwayne J. Briscoe