On August 8, 2020, the White House issued a Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The Memorandum directed the Department of Treasury to act under its emergency authority to issue guidance that would allow employers to defer the withholding and payment of the employee portion of Social Security taxes.
On August 28, 2020, the IRS acted under the authority delegated to the Department of Treasury and published implementing guidance under Notice 2020-65 ("Notice"). The Notice provides that employers may defer withholding the 6.2% employee portion of the Old Age, Survivor, and Disability Insurance (Social Security) tax for certain wages paid to employees between September 1, 2020, and December 31, 2020. Social Security tax applies to wages and compensation paid up to the annual wage base limit, which is $137,700 for 2020.
Employers are not required to defer withholding and payment of any taxes under the Memorandum or Notice. Employers who elect to defer must pay the deferred tax by April 30, 2021. The deferral of the employee portion of the Social Security tax is separate and apart from the deferral provided by the Coronavirus Aid, Relief and Economic Security Act, which allows employers to defer payment of the employer portion of Social Security taxes through the end of 2020 and to pay such deferred amounts by the end of 2022.
What Payments Are Eligible for Deferral of the Employee's Social Security Tax?
Under the Notice, employers may choose to defer withholding the employee portion of the Social Security tax from all taxable payments of wages and compensation made between September 1, 2020, and December 31, 2020, so long as the total amount of such wages and compensation is less than $4,000 per biweekly pay period. Employers that elect for this deferral must continue to withhold and deposit income tax and other employment tax (such as the 1.45% employee portion of the Medicare tax) from employee wages.
The Notice makes clear that the $4,000 limitation is applied on a per-pay-period basis. In other words, if an employee has at least $4,000 of taxable wages and compensation in one biweekly pay period, that payment is not eligible for deferral. However, deferral would still be available for any other biweekly pay period in which the same employee's total taxable wages and compensation are less than $4,000. The Notice states that employers should apply an "equivalent threshold amount with respect to other pay periods" but does not clarify how this limitation is calculated for taxable wages and compensation paid on a different payment schedule (e.g., twice-monthly or monthly pay periods or a one-time supplemental wage payment).
When Will the Deferred Taxes Become Due?
The Notice provides that employers must withhold and pay the deferred taxes from wages and compensation "ratably" between January 1, 2021, and April 30, 2021. The Notice states that employers are allowed to "make arrangements to otherwise collect the total [deferred tax] from the employee," if necessary, but it does not describe what those arrangements might be. It is also unclear how an employer will report to its affected employees and the IRS on Forms W-2 that the employer elected to defer the tax and the amount of such deferral.
The IRS may release additional guidance or publish revised forms telling employers and employees how the deferred tax may be reported and paid. A draft revised Form 941—the quarterly payroll tax return employers file to report wages paid and taxes withheld from those wages—has been released that would allow employers to report deferred employee payroll taxes.
To the extent an employer does not or cannot pay the deferred taxes before May 1, 2021, the IRS may impose interest, penalties, and additions to tax with respect to any such amounts outstanding. Potential penalties that may result from an employer's failure to withhold, deposit, or pay the tax include:
- The failure-to-deposit penalty under Section 6656, which is up to a 10% penalty on amounts withheld by employers but not deposited with the Treasury. The penalty can increase to 15% if the amounts remain unpaid after the IRS issues a notice demanding payment.
- The failure-to-pay penalty under Section 6651, which is a 0.5% per month penalty, up to 25% of the total tax due, on amounts: (i) shown as tax on any return and not timely paid; or (ii) that should have been withheld and paid and remain unpaid 10 or 21 days (depending on the amount of outstanding taxes) after notice and demand for payment has been sent to the taxpayer.
In addition, the Code provides the IRS with the ability to impose liability for 100% of the unpaid tax directly on the "responsible person" with respect to an employer for his or her willful failure to collect, deposit, or pay any taxes for which he or she was responsible. The responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director/trustee, or an employee of a sole proprietorship, or any other person or entity that is responsible for collecting, accounting for, or paying over the taxes, or who otherwise has authority to cause the spending of business funds as an officer, director, or employee of the employer. The Notice is silent with respect to the potential application of the responsible person penalty if the employer elects to defer payment of Social Security taxes and then fails to pay the deferred amount as required by April 30, 2021.
While the Notice provides answers to some important questions, it leaves many others unanswered. Whether employers will elect to defer payment of Social Security taxes as permitted under the Notice remains uncertain. The U.S. Chamber of Commerce and other business associations representing employers have stated that many companies may not participate in the deferral because of the difficulties of administering it and the burden it will place on employees in 2021. Meanwhile, the federal government has announced that it will begin to defer Social Security tax from the wages of federal employees beginning with payments made in September 2020.