President Trump issued an executive order on August 8, 2020 providing that employers could defer (but not forgive) the employee’s portion of Social Security taxes for certain employees for wages paid between September 1, 2020 and December 31, 2020. The Social Security tax is the 6.2% portion of the employment taxes taken out of employees’ paychecks. Also, President Trump tasked the Treasury Department with providing guidance to implement the order and also to explore ways to eliminate the obligation to pay the deferred taxes.
The Treasury Department just issued Notice 2020-65 providing guidance on how to implement the deferral. The guidance states that the “applicable taxes” (which are the 6.2% employee payroll taxes on applicable wages) are postponed until the period beginning on January 1, 2021, and ending on April 30, 2021.
What Employees are eligible for the payroll tax deferral
For purposes of this deferral, “applicable wages” are generally wages paid to an employee on a pay date starting September 1, and ending December 31, 2020, but only if the wages for a bi-weekly pay period are less than $4,000 (or the equivalent threshold amount for other pay periods). The determination of applicable wages is to be made on a pay period-by-pay period basis. If the amount of wages for a pay period is less than the threshold amount, then that amount is considered applicable wages (and thus eligible for the deferral) for that pay period.
The thresholds for various pay periods are as follows:
Weekly pay period – Applies if wages are less than $2,000.00
Biweekly pay period – Applies if wages are less than $4,000.00
Bimonthly pay period – Applies if wages are less than $4,333.33
Monthly pay period – Applies if wages are less than $8,666.67
There is no deferral available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period. The deferral only applies if the worker makes less than the threshold amount for the pay period.
How the payment of deferred taxes should be made
The employer is to withhold and pay the “applicable taxes” (the amount deferred between September 1 and December 31, 2020) ratably from wages paid between January 1 and April 30, 2021. Note that employers may make arrangements to otherwise collect the tax from the employee if necessary (presumably if the employee is no longer employed). The notice appears to require the employer to make the repayment whether or not the employer is able to withhold the tax from the employee. If the taxes are not remitted by the employer, the employer could be subject to penalties and interest.
Is this mandatory or optional?
The notice does not reference Treasury Secretary Mnuchin’s previous comment that indicated that the deferral will not be mandatory. While it appears the implementation by the employer is optional, whether the employee has the option to opt-in or opt-out is not addressed. At this point, it appears some of the options for employers are:
- Ignore the deferral and continue withholding and remitting the employee’s payroll taxes as usual
- Impose the deferral on all applicable wages – so if an employee’s wages during the pay period are under the threshold, the deferral will apply from September 1 through December 31, 2020, and the increased withholding to repay the deferral will apply from January 1 through April 20, 2021
- Allow employees with applicable wages to choose if they want the deferral to apply
Click here to read Notice 2020-65 https://www.irs.gov/pub/irs-drop/n-20-65.pdf
Reach out to our team at MWB for any questions you may have.