New Guidance Regarding Deferral of Withholding of Employees’ Social Security Taxes

Ruder Ware

On August 8, 2020, President Donald Trump issued an executive order titled “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.”  The order directed the Secretary of the Treasury to use its authority to defer the withholding, deposit, and payment of certain payroll tax obligations.

On August 28, 2020 the U.S. Department of the Treasury issued guidance (Notice 2020-65) to employers regarding how to implement the deferral allowed in the order.  The guidance provides that employers are allowed, but not required, to defer withholding of the employee portion of the Social Security payroll taxes (“applicable taxes”) on “applicable wages” until next year.  “Applicable wages” are wages paid to employees between September 1, 2020 and December 31, 2020, but only if such wages or compensation are less than the threshold amount of $4,000 for a bi-weekly pay period or the equivalent threshold amount with respect to other pay periods.  The determination is made on pay period-by-pay period basis.

If an employer elects to stop withholding applicable taxes on applicable wages, the employer must recapture those withholdings out of all of the employee’s paychecks for the period January 1, 2021 through April 30, 2021, on a pro rata basis each pay period.  Any withholdings deferred that are not caught up by May 1, 2021 (meaning the taxes must be remitted to the IRS) will accrue interest and penalties.  The Treasury guidance does note that if it is necessary (for example if the employee terminates employment prior to April 30, 2021), the employer may make “other arrangements” to collect the deferred taxes from employees.

The new guidance essentially provides four takeaways:

  1. If the applicable taxes are not withheld and remitted in full by April 30, 2021 through the withholding from the employee’s paychecks, the employer is responsible for the taxes that are not remitted, and if the employer does not remit, the individual who is responsible for withholding and remitting within the organization is personally responsible.
  2. The postponement of the obligation to withhold on applicable wages is not mandatory on the part of the employer.
  3. These taxes are deferred, not forgiven, and will be due by April 30, 2021, unless further action is taken.
  4. It does not appear that the employee has any say in the decision to defer or pay these taxes in normal course. The Treasury guidance applies to the employer as taxpayer, not to individual employees.

To read the IRS guidance in full click here.

(Special thanks to Nicole Zeman for her assistance with this article)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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