Payroll Tax Deferral – Effective 9/1
September 2, 2020
On August 8, 2020 the President directed the IRS Treasury to defer the withholding, deposit and payment of the 6.2% federal social security tax withheld from eligible employee’s paychecks from September 1, 2020 to December 31, 2020, which will increase employee’s net take-home pay by 6.2% (the amount of social security tax normally withheld). In the Memorandum (link) he also requested the Treasury to explore options for the forgiveness of the deferral. No guidance has been issued regarding the forgiveness of this tax deferral as of September 2, 2020.
The Treasury issued information on Friday August 28 in Notice 2020-65 (link) with information on how to apply this payroll tax deferral. Below are our observations and take-aways from the Memorandum and Notice:
- Any company that has payroll is considered affected by COVID-19 and is eligible to participate in the deferral program.
- The employer makes the decision on whether or not they will participate in the deferral program.
- The deferral period for the 6.2% social security tax begins 9/1/2020 and ends 12/31/2020.
- The repayment period begins on 1/1/2021 and ends 4/30/2021. The employer is required to withhold the deferred amount ratably over that period. If repayment isn’t made by 4/30/2021, then penalties, interest, and additional taxes will begin to accrue 5/1/2021.
- There is an exception to withholding the amount ratably during the repayment period, the IRS states that “If necessary the employer may make arrangements to otherwise collect the total applicable taxes from the employee”. The IRS doesn’t expand on this, but presumably, could this mean that if an employee is terminated or leaves before 4/30/21 that the employer can withhold the entire deferral amount from the employee’s final paycheck? Perhaps, but more information is needed on this.
- Eligible wages are wages paid to any employee whose bi-weekly pay doesn’t exceed $4,000 (pay rates prior to 9/1/2020 are not considered – meaning if the employee was making more than $4,000 bi-weekly prior to 9/1/2020 it doesn’t preclude them from participating).
- Applicable wages are determined on a pay-period by pay period basis – so if an employee’s wages exceeds the $4,000 threshold the first bi-weekly pay period but then is under the threshold the second pay period then the second pay period’s social security tax is eligible for deferral.
- There is no indication whether individual employees can opt-out if the employer decides to participate in the deferral program.
You should check with your payroll service to determine how they plan to implement this deferral program, should you choose to participate.
As always we will keep you informed as more guidance is issued. Please call or email if you have any questions.