Executive Memo Allows Deferral of Payroll Tax in Light of COVID-19September 10, 2020 – Alerts
Employers should weigh carefully whether to participate in the voluntary deferring of the employee portion of Social Security taxes pursuant to the executive memorandum issued by President Trump on August 8, 2020.
The memorandum provides that the payroll tax deferral is available from September 1, 2020 until December 31, 2020 with respect to workers making less than $4,000 for any bi-weekly pay period ($104,000 per year). The memorandum also provides that the amounts deferred shall be deferred without any penalties, interest, additional amount, or addition to the Social Security payroll tax.
As this provides only for deferral of the Social Security tax, the memorandum directs the Secretary of the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the Social Security payroll taxes deferred. Although the Secretary of the Treasury may explore options to forgive the amounts deferred under the executive memorandum, only legislation passed by Congress and signed by the President can effectively eliminate the Social Security payroll tax amounts deferred.
While employers may want to improve workforce morale in the short-term, it is advisable that employers consider the potential tax liabilities that may arise in the event that the deferral is not made permanent.
IRS Notice Implementing Payroll Tax Deferral
On August 28, 2020, the IRS issued Notice 2020-65 which provides that employers that are required to withhold and pay the 6.2% employee share of Social Security tax (or the railroad retirement tax equivalent) are permitted to postpone the withholding and payment of the employee share of Social Security tax until January 1, 2021. The Notice also provides that the Social Security taxes that are deferred from September 1, 2020 to December 31, 2020 will have to be withheld and paid ratably from paychecks issued between January 1, 2021, and April 30, 2021, or interest, penalties, and additions to tax will begin to accrue on May 1, 2021. Additional guidance may be needed to clarify issues including how the deferred amounts should be reported on Form W-2 and whether non bi-weekly compensation such as bonuses, overtime pay, and other extraordinary compensation are taken into account in determining the $4,000 bi-weekly pay limitation.
Deferral Is Voluntary
The executive memorandum and Notice 2020-65 provide that the payroll tax deferral is voluntary and companies may choose whether or not to implement the deferral.
As the Notice indicates that employers will be responsible for the collection and payment of the deferred Social Security payroll taxes from January 1, 2021 to April 30, 2021, companies may be hesitant to defer the employee portion of Social Security taxes as they may not be able to collect the amount deferred from employees.
For example, if a company defers the 6.2% Social Security tax for the last four months of 2020 for an employee, and that employee leaves the company at the end of 2020, the employer would remain liable for the employee’s share of Social Security payroll taxes that it deferred. While the Notice provides that employers may make arrangements for employees to repay the deferred payroll taxes, the employer is ultimately liable if it is unable to collect and remit the deferred payroll taxes from January 1, 2021 to April 30, 2021.
Issues to Consider
While it may be beneficial for employee morale to defer collecting and remitting the employee portion of Social Security taxes, employers should consider clearly explaining to employees that the deferral will have to be paid back ratably from January 1, 2021 through April 30, 2021. As such, employees would be on notice that while they may take home larger paychecks in the last four months of 2020, if Congress does not act, the employees would take home smaller paychecks in the first four months of 2021. Although morale may improve for the last four months of 2020, if the deferral is not made permanent, morale may decline in early 2021 when paychecks would be smaller.
Employers should also consider issues that may arise in the event that an employee is terminated, leaves the employer voluntarily, or retires after Social Security taxes have already been deferred, but before the deferred amounts can be collected and remitted to the IRS. If the employer has not made arrangements to collect and remit the deferred Social Security payroll taxes from the employee, then the employer would be responsible for the deferred amounts.
Employers should consider whether they want to potentially risk not being able to collect and remit the deferred amounts from 2020 in 2021 as Social Security payroll taxes are considered “trust fund” taxes which are subject to the Trust Fund Recovery Penalty in which the government may hold certain individuals personally liable for the employee portion of Social Security taxes that are not collected and remitted to the IRS.
If you have any questions about this alert, please contact Maureen Monaghan at 646.601.7628 or [email protected], Adam Young at 215.444.7237 or [email protected], or a member of Fox Rothschild’s national Taxation & Wealth Planning Practice.