On August 8, 2020, President Trump issued an executive order regarding the deferral of certain employee funded social security taxes (i.e. 6.2%). Of note, the CARES ACT allowed some employers to defer the employer funded portion of social security taxes. On August 28, the IRS issued Notice 2020-65 which addresses questions / concerns arising from the Executive Order.
Payroll taxes generally include Social Security (12.4%) and Medicare (2.9%), collectively referred to as FICA taxes (15.3%). The taxes are shared by employers and employees evenly (therefore employer pays 6.2% and 1.45% respectively and employee pays 6.2% and 1.45%) with a requirement that employers withhold and deposit the employee share of such taxes. Social Security taxes are due on wages up to $137,700 and Medicare taxes are due on all wages. Of note, an additional Medicare tax of .9% is applicable to wages above $200,000.
The Executive Order
The Order directed the Treasury Secretary to use IRC Section 7508A authority to defer the withholding, deposit and payment of the employee share of social security taxes (6.2%) for the periods September 1, 2020 through December 31, 2020 on ‘applicable wages’ until January 1, 2021 through April 30, 2021.
‘Applicable wages’ include those wages paid to employees who make during a biweekly basis, less than $4,000 (or the equivalent amount for other pay periods).
IRS Notice 2020-65
IRS Notice 2020-65 clarifies some of the ambiguity within the Executive Order, specifically:
- Employers are allowed (but not required) to defer the withholding and payment of employee social security tax on applicable wages from September 1, 2020 through December 31, 2020.
- The Notice states that the withholding and deposit of taxes on applicable wages is ‘postponed’ until the period beginning January 1, 2021 and ending April 30, 2021. It does not appear to place any requirement on the employer to defer withholding and deposit.
- An employer that defers such taxes, must withhold and pay the deferred taxes ‘ratably’ between January 1, 2021 through April 30, 2021.
- Applicable wages are those paid to an employee on a pay date between September 1, 2020 through December 31, 2020. Accordingly, applicable wages paid Tuesday September 1, 2020 through Thursday December 31, 2020 are eligible for deferral.
- Determination of whether an employee’s wages are “Applicable Wages” is determined on a pay period by pay period basis with the limits appearing to be:
- Weekly – $2,000
- Biweekly – $4,000
- Bimonthly – $4,333
- Monthly – $8,666
Accordingly, an employee may be eligible in one payroll period but not another if pay amounts between payroll periods differ (i.e. a bonus is paid out)
- The Order and Notice provide that withheld taxes are to be paid ratably between January 1, 2021 and April 30, 2021, however, it specifically states that penalties and interest will accrue May 1, 2021 if deferred taxes are unpaid. Therefore, can a lump sum payment be made on April 30, 2021?
- The Notice specifically provides that employers can ‘make arrangements’ with employees to collect the deferred taxes from the employee.
- The deferral appears to be at the option of the Employer, however, can an employee compel the Employer to defer the employee social security taxes if the applicable wage standard is met? Can the employee opt out of a deferral of such taxes?
- What exposure does an Employer have for deferred taxes owed in 2021 for an employee that does not work for the company between January 1, 2021 through April 30, 2021?
- How will third party (or internal) payroll processing systems be adjusted to account for such deferrals (especially if employees are eligible for some periods but not others).
- Will there be a retroactive adjustment if payroll companies cannot implement a system timely?
- Will a deferral affect existing CARES ACT credits?
- President Trump has indicated that he wants to terminate any obligation for deferred taxes. Such action would require congressional support. If passed, how what impact would there be for those that defer and those that do not?