A Presidential Memorandum issued Aug. 8 directed the Secretary of the Treasury to postpone from Sept. 1 through Dec. 31, 2020, the withholding, deposit, and payment of the employee portion of Social Security tax, free of any interest or penalty. The deferral is to apply, at the employer’s option, to employees whose pre-tax wages during any biweekly pay period during the four-month period are less than $4,000 (equivalent to an employee earning less than $104,000 per year).
On Aug. 28, the IRS issued details on how and when deferred payroll taxes must be paid.
Pursuant to Notice 2020-65, any such deferred 2020 tax amounts must, from Jan. 1 through April 30, 2021, be ratably withheld from wages and paid to the Treasury. The Notice specifies that interest and penalties will begin to accrue on May 1, 2021, for any unpaid amounts.
What does CohnReznick think?
It is important for employers and their employees to keep in mind that the payroll tax liability has been deferred only, not forgiven; deferred Social Security tax withholding for the last four months of 2020 will need to be collected from employees over the first four months of 2021. This typically will mean that affected employees will be finding their wages reduced by double the OASDI amount to which they may be accustomed. However, mathematically the maximum amount of “double withholding” an employee would face would be only $2,150 (6.2% x $104,000 x 1/3), and some employees may wish to utilize this deferral.
There remain unanswered questions surrounding this deferral, such as whether the employer, if opting for this deferral, must apply this deferral to all eligible employees or whether it may provide each eligible employee the option to defer, or whether an employer may otherwise apply the deferral to certain eligible employees at its discretion.
There are also risks to the employer, such as being responsible for any amount not recovered from an employee should the employee terminate employment and not have enough wages from which to recoup the deferred amount. Plus, there may be risks relevant to implementing and administering the deferral, which could prove complex for payroll tax processors.
Subject matter expertise
JD, LLM, Managing Director - National Tax Services
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.