On Friday, August 28, the Treasury Department (“Treasury”) released guidance implementing President Trump’s executive directive to defer the employee portion of social security tax. As part of the continued response to the COVID-19 pandemic, Notice 2020-65 allows employers to make this deferral during the period of September 1, 2020 through December 31, 2020 for employees earning below a threshold amount of $4,000 during a bi-weekly pay period. This threshold is to be determined on a per-pay period basis rather than as an annualized amount. While not clearly stated in the Notice, both Treasury and the Internal Revenue Service (“IRS”) have framed the deferral as optional for employers.
For those employers who do choose to defer the employee share of social security tax, these amounts will be postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. This could mean that absent further legislation affording permanent forgiveness of these amounts, employees would be obligated to make increased payroll payments for that four-month period. If employers fail to withhold and deposit any deferred amounts by May 1, 2021, the Notice states that they will be on the hook for penalties and interest—again, assuming Congress fails to enact legislation that says otherwise.
What remains unclear is whether employees may choose to opt out of an employer’s choice to defer and how employers should treat the deferred taxes of employees who are terminated before these amounts are fully repaid in 2021. The Notice does, however, state that “[i]f necessary, the [employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee,” suggesting that an employer could, for example, deduct any deferred tax owing from an employee’s final paycheck to the extent permitted by the Fair Labor Standards Act.
The IRS has released a draft update of Form 941, Employer’s Quarterly Federal Tax Return, on which employers may take into account employee social security withholding that is deferred. The key change appears to be on page 3, line 24, which asks for the “Deferred amount of the employee share of social security tax included in line 13b.”
We hope to see more concrete guidance from Treasury in the coming weeks.