Deferral of Employee Payroll Tax Obligation
President Trump signed several executive orders on Saturday, August 8. One of these orders allows for the suspension of Social Security tax collection for individuals making less than $4,000 on a bi-weekly basis, and is effective September 1 through December 31, 2020.
On August 28, the IRS provided guidance to employers on how to apply the memo in respect to the applicable wages and due date of deferred social security taxes.
Employers may defer the employee share of Social Security Tax on any wages normally subject to Social Security up to an amount of $4,000 in compensation paid bi-weekly or equivalent with respect to other pay periods.
The limit of $4,000 should be applied on a per pay period basis without regards to amounts paid in other pay periods.
The Notice provides that employers must withhold and pay any deferred payroll taxes from employee wages and compensation paid from January 1, 2021, through April 30, 2021, on a ratable basis. The Notice also states that “[i]f necessary,” employers can “make arrangements to otherwise collect” the deferred taxes. If any deferred payroll taxes are not repaid by April 30, interest, penalties, and additions to tax will begin to accrue May 1.
Employers that implement the deferral will need to address situations in which employees with deferred taxes terminate employment before the deferred taxes are collected (i.e., later in 2020 and before April 30, 2021), most probably by structuring “arrangements to otherwise collect” the deferred taxes in this circumstance, such as by collecting the taxes from a final paycheck or by separate check from the employee. Employers should consider state wage payment laws and other limitations in developing plans for this situation.
It is important to note that Congress could choose to waive these payments through legislative action; but until that occurs, taxpayers should be prepared to remit these funds to the IRS next year, and Employers are ultimately the responsible party for the repayment of these funds.