Surrounded by a cloud of uncertainty and high risk, few, if any, businesses have taken up the federal government’s seemingly attractive offer to allow deferral of the next three months of the employee portion of Social Security tax withholding. Even with the issuance of IRS Notice 2020-65 answering some of the open questions, enough remains uncertain and risky that businesses should use extreme caution before adopting the deferral.
We previously discussed the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” (the Memorandum) issued by President Trump. The Memorandum directed the Secretary of Treasury to use his authority to defer the withholding of the employee portion of Social Security (not Medicare) tax from an employee’s paychecks issued between September 1 and December 31 if employee’s annualized compensation is less than $104,000 (e.g., biweekly wages of less than $4,000) (Applicable Wages). Secretary Mnuchin quickly clarified that employers could elect whether or not to participate in this deferral of employee taxes. We are unaware of any business that accepted the invitation to participate.
The Notice provides guidance for employers choosing to participate. Pursuant to the Notice, the deferral of the employee-portion of social security tax on Applicable Wages (Applicable Taxes) lasts until the period beginning January 1, 2021, and ending April 30, 2021 (much shorter than the deferral allowed for the employer-portion of social security taxes, which we discussed here and here). Employers generally must withhold and pay the deferred Applicable Taxes ratably from wages paid between January 1, 2021, and April 30, 2021. The Notice also provides that employers “may make arrangements to otherwise collect the total Applicable Taxes from the employee” – which will be necessary for employees who cease working for the employer before the end of the deferral period. Interest, penalties and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes. Presumably, such future withholding will not violate state payroll laws, but it might be good practice to insist on a written agreement with the employee.
Although the Notice answers some open questions raised by the Memorandum, the fundamental risks with employers remaining liable for unpaid Applicable Taxes remain unchanged. Further, now that we know the limited deferral period and that the deferred taxes are not forgiven, many employers may find the costs and administrative burdens of implementing the deferral to outweigh the benefits. Prior to the release of the Notice, many employers were wary about the Memorandum. We doubt that the Notice will change this prior determination.