On Friday August 28, The IRS issued guidance (Notice 2020-65) on President Trump’s executive memorandum authorizing employers to defer the collection of the employee’s portion of Social Security and Medicare, collectively known as FICA taxes, from September 1 through December 31, 2020. The guidance provides employers with basic information on key items, including definitions of an affected taxpayer and applicable wages, the eligibility threshold, and when the deferred taxes shall be repaid.
Affected Taxpayers – The notice states an affected taxpayer is an employer who is required to withholding and pay the employee share of social security tax under section 3102(a) that has been affected by the COVID-19 emergency.
Applicable Wages – The notice states applicable wages are wages defined in section 3121(a) or compensation as defined in section 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, if the amount of such wages and 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 periods.
Deferred Applicable Taxes – the notice states deferred applicable taxes are taxes imposed by section 3101(a) and so much of the tax imposed by section 3201 (commonly known as payroll/FICA taxes) on Applicable Wages defined above.
Payment of Deferred Applicable Taxes – An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under Notice 2020-65 from wages and compensation paid between January 1, 2021 and April 30, 2021, with respect to any unpaid Applicable Taxes
Key Questions, Observations and Potential Implementation Issues
- Is the notice mandatory?
- The notice states that implementation by an employer is optional, but is silent regarding whether the eligible employee has any choice on whether the employer implements the deferral.
- Different ways for employer to implement
- Elect not to defer and continue to withhold and deposit the employee’s payroll tax obligation
- Allow eligible employees to make the election
- Require deferral for all eligible employees
- Continue withholding and depositing, but offer employees a nominal bonus to acknowledge the lack of deferral benefit while easing the company’s own administrative burden of a short-term implementation
- Communication is Key!
- Inform employees that it is expected that deferred payroll taxes will have to be paid back between January 1 and April 30, 2021.
- Have employees sign a contract agreeing to additional withholding up to twice the normal amount of payroll taxes in the period from January 1 through April 30, 2021.
- Include in the employee contract the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to such a time when all deferred payroll taxes have been repaid.
- Have a plan in place to account for repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he or she earned in 2020.
- Make sure your payroll team or payroll provider understands its obligations for adjusting paychecks to reflect the deferral and then, next year, adjusting paychecks to repay the deferred amount.
We are monitoring developments and their implications closely and will provide additional updates as guidance is released.