On August 28, the IRS issued guidance providing employers with basic information on deferral of withholding and remittance of employee’s share of Social Security tax when wages are below a certain amount. The guidance in Notice 2020-65 was issued to implement President Trump’s executive action signed in early August.
The guidance is brief, and employers will likely still have questions about whether, and how, to implement the deferral. The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes later unless Congress passes a law to eliminate the liability.
Tax deferral background
On August 8, President Trump signed a Presidential Memorandum that permits the deferral of the employee portion of Social Security taxes for certain employees due to the COVID-19 pandemic.
The memorandum directed the Secretary of the Treasury to defer withholding, deposit and payment of an eligible employee’s share of Social Security FICA taxes (6.2%) on wages or compensation paid from September 1, 2020, through December 31, 2020. Wages are applicable for deferred withholding only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay frequencies. The determination of applicable wages is made on a pay period-by-pay period basis. Amounts can be deferred without penalties, interest or additions to the tax.
Note: Neither the executive order nor the IRS guidance requires an employer to defer the withholding of the employee FICA taxes. Thus, an employer may choose to continue to withhold and deposit employee FICA taxes as usual.
Points of concern
The employer is generally obligated to withhold and remit an employee’s social security taxes and the employer may be held liable for taxes not withheld plus various types of penalties.
There is also a “responsible person” penalty for amounts an employer deducts from employee wages for employee social security taxes and/or income taxes. A “responsible person” can be held personally liable for such taxes. The current guidance provides no relief for the potential application of this penalty.
Note: Under the CARES Act, employers can already defer paying the employer portion of Social Security taxes through December 31, 2020. All 2020 deferred amounts under the CARES Act legislation are due in two equal installments – one at the end of 2021 and the other at the end of 2022.
There are still many unanswered questions about the payroll tax deferral. We urge employers to carefully consider the merits, and risks, associated with this deferral before acting. If you need assistance or have questions about how to proceed at your business, contact us. We can help you decide whether to participate and how to go forward.
Contact your AGH professional or Cindy McSwain using the information below.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.
Senior Vice President
Cindy McSwain leads AGH’s outsourcing services group. Her team provides payroll, accounting, funds disbursement, controller, and other financial outsourcing services to numerous clients throughout the U.S. Prior to joining the outsourcing group, Cindy served AGH’s audit clients for 10 years, working with a wide range of middle-market, closely held and family-owned organizations.
Her current clients cross many industry sectors, including manufacturing and distribution, restaurants, retailers, medical and not-for-profit. She has participated in numerous SEC filings and public registrations and has experience in mergers and acquisitions. Cindy is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants.