Payroll Tax Deferrals
On August 28, 2020, the Treasury Department issued Notice 2020-65 that provides additional guidance regarding last week’s Presidential Memorandum titled:
This article will explain the tax deferral that is applied to employees. The tax deferral can only be applied to employees whose bi-weekly wage is less than $4,000. The tax deferral can also apply to employees who are working overtime for additional pay.
The Presidential Memorandum allows employers to defer the withholding, deposit, and payment of the employee share of the Social Security Tax for wages paid between September 1, 2020, and December 31, 2020.
Notice 2020-65 explains that these taxes will have to be withheld and paid to the IRS between January 1, 2021, through April 30, 2021. Therefore, the postponement of withholdings would effectively result in a doubling up of withholding from the employee in the first four months of 2021. If the deferred payroll taxes are not paid back during the payback period, employers would have to pay interest and penalties.
As with the Presidential Memorandum, interpretation of Notice 2020-65, as well as statements made by the Treasury Secretary, indicate that the postponement of withholding social security taxes is not mandatory. Therefore, employers appear to be able to opt out. Employers will need to weigh the benefits and risks of the postponed deferral.
If employers do elect to defer withholdings, they will need to notify affected employees. It is unclear from the Notice whether employees would then have a choice to opt out of the deferred withholding. Employees whose withholdings will be impacted should provide a signed acknowledgment to the employer that they understand that their net income will be increased by 6.2% (the amount of Social Security taxes) between September 1 and December 31, 2020, and that social security taxes will effectively be doubled from January 1 through April 30, 2020, as a result. The acknowledgment should also state that they agree to pay back any amount due in the event they leave the company prior to April 30, 2021.
The tax deferral can only be applied to employees whose bi-weekly wage is less than $4,000. The thresholds are to be applied pay period by pay period when an employee’s compensation varies.
For additional details, see the notice below.
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