Executive Order
On August 8, 2020, in connection with the COVID-19 pandemic, President Trump issued an Executive Order directing the Secretary of the Treasury to use his authority to permit the deferral of the employee portion of Social Security taxes on compensation (i.e., the 6.2 percent Social Security tax paid by employees on compensation less than the Social Security wage base) paid during the four-month period beginning September 1, 2020, and ending December 31, 2020. Importantly, the order applies only to the employee share of Social Security taxes and not the additional 6.2 percent of Social Security tax paid by the employer. Further, the order permits the deferral only with respect to employees whose bi-weekly compensation is less than $4,000.

IRS Guidance
Notice 2020-65 provides much-needed guidance on the Executive Order. While the guidance is somewhat vague, we conclude that:

• The deferral is not mandatory. Whether to defer any employee’s Social Security taxes is up to the employer.
• Employees cannot force or otherwise require the employer to defer the employee portion of Social Security taxes. The employer may, however, offer the deferral to employees on a voluntary basis.
• If an employer chooses to defer any employee’s Social Security taxes, then:

- The employer must withhold the deferred taxes ratably from wages and compensation paid to the employee between January 1, 2021, through April 30, 2021. To the extent the deferred taxes are paid to the IRS within this period, no penalties, interest, or other additions (collectively “IRS sanctions”) will apply.

- Note that combined with regular Social Security taxes (6.2 percent) payable by the employee on wages and compensation during this period, the withholding of the deferred tax (additional deferred 6.2 percent) will result in a combined Social Security tax withholding obligation of 12.4 percent.

- Beginning May 1, 2021, IRS sanctions will start accruing on any deferred taxes that remain unpaid by the employer.

- The employer is liable for any deferred taxes not withheld from the employee’s compensation. For example, if the employee terminates from employment, dies, or otherwise does not pay the deferred taxes, the employer must pay the amount to the IRS. The employer would have to make separate arrangements to recover the amount from the employee.

Administrative Considerations
Permitting the deferral presents several drawbacks for an employer. Chiefly, as noted, the deferral would expose the employer to potential tax liability to the extent the deferred amounts are not collected from employees. In addition, the administrative burden with respect to the deferrals could be substantial. To implement deferrals, the employer would likely have to adjust its payroll systems to provide for the deferrals and repayments. The employer would need to furnish appropriate communications to employees and expend resources explaining the deferral and repayment processes. The employer should obtain written consent from each employee in regard to the repayment of deferred taxes not recovered through withholding. Furthermore, the employer should consider state law compliance before implementing deferrals. For example, the employer should assess whether it could immediately collect the amount of tax that remains deferred from an employee’s wages if the employee terminates employment before full repayment.

Considering the minimal benefit that the deferral provides to employees—essentially, a short delay of payment of the 6.2 percent tax, and the fact that the employees will need to repay those amounts at a later date—a cost/benefit assessment seems to weigh against offering deferrals.

For these reasons, employers should not consider deferring any employee’s Social Security taxes under the Executive Order, unless there is some compelling internal reason for doing so.