Social Security Payroll Tax Deferral

Executive Order On August 8, 2020, in connection with the COVID-19 pandemic, President Trump issued an Executive Order directing the Secretary of the Treasury to use his authority to permit the deferral of the employee portion of Social Security taxes on compensation (i.e., the 6.2 percent Social Security tax paid by employees on compensation less than the Social Security wage base) paid during the four-month period beginning September 1, 2020, and ending December 31, 2020. Importantly, the order applies only to the employee share of Social Security taxes and not the additional 6.2 percent of Social Security tax paid by the employer. Further, the order permits the deferral only with respect to employees whose bi-weekly compensation is less than $4,000.

IRS Guidance Notice 2020-65 provides much-needed guidance on the Executive Order. While the guidance is somewhat vague, we conclude that:

The deferral is not mandatory. Whether to defer any employee’s Social Security taxes is up to the employer.

Employees cannot force or otherwise require the employer to defer the employee portion of Social Security taxes. The employer may, however, offer the deferral to employees on a voluntary basis.

If an employer chooses to defer any employee’s Social Security taxes, then:

-  The employer must withhold the deferred taxes ratably from wages and compensation paid to the employee between January 1, 2021, through April 30, 2021. To the extent the deferred taxes are paid to the IRS within this period, no penalties, interest, or other additions (collectively “IRS sanctions”) will apply.

-  Note that combined with regular Social Security taxes (6.2 percent) payable by the employee on wages and compensation during this period, the withholding of the deferred tax (additional deferred 6.2 percent) will result in a combined Social Security tax withholding obligation of 12.4 percent.

-  Beginning May 1, 2021, IRS sanctions will start accruing on any deferred taxes that remain unpaid by the employer.

-  The employer is liable for any deferred taxes not withheld from the employee’s compensation. For example, if the employee terminates from employment, dies, or otherwise does not pay the deferred taxes, the employer must pay the amount to the IRS. The employer would have to make separate arrangements to recover the amount from the employee.

Please contact your CPA or Payroll provider for questions and further guidance.