Covering Your Assets: Guidance for Employee Social Security Tax deferral (Voices)
Covering Your Assets
On Aug. 8, 2020, President Trump signed four Executive Actions, including a Presidential Memorandum (“the memorandum”) to allow employees to defer certain payroll tax obligations for payroll paid during the period Sept. 1, 2020, through Dec. 31, 2020.
On Aug. 28, 2020, the Treasury Department issued Notice 2020-65, setting forth guidance for the President’s Executive Action directing the Secretary of the Treasury to use his authority to defer the withholding, deposit and payment of the employee’s share of Social Security tax.
Unfortunately, the Notice is short on details.
Is deferral mandatory?
One of the questions many have had is whether the deferral is mandatory. The Notice is silent on that issue.
Since the Notice is silent and there are no penalties that could apply if employers continue to withhold following normal procedures, the deferral does not appear to be mandatory.
If an employer does not opt into the deferral, it would be prudent for employers to consider communicating with employees why they are not going to defer (i.e., disruption of processes, risk of errors from changing procedures, cost of modifying computer programs for a temporary period).
What are applicable wages?
The Notice defines Applicable Wages as wages defined in IRC section 3121(a) or compensation defined in IRC section 3231(e). The Notice also provides Applicable Wages only include wages or compensation paid for a bi-weekly pay period that are less than the threshold amount of $4,000, or the equivalent threshold amount for pay periods other than bi-weekly.
The threshold level of employee wage appears to be a cliff. If the wage amount for the bi-weekly period is $4,000 or more, withholding continues in the same manner as before. This is a payroll-period-by-payroll-period determination for each employee.
If the wage expense for an employee in one bi-weekly period is $4,000 or more, withholding continues. If, however, in the next period, the wage expense for that employee is less than $4,000, the withholding is deferred for that employee.
If payroll is computed on a semi-monthly basis, the cliff is $4,333.33 per pay period. The threshold for monthly payroll should be $8,666.67; weekly = $2,000.
Who withholds and deposits the deferred taxes?
The Notice implies that the employer is ultimately responsible for withholding and depositing the deferred tax. The employer is directed to withhold amounts ratably from wages and compensation paid between Jan. 1, 2021, and April 30, 2021.
If the taxes are not deposited by May 1, 2021, interest, penalties and additions to tax will begin to accrue with respect to any unpaid deferred employee Social Security tax.
In addition to the Notice, the IRS also released a draft Form 941 that includes a separate line to report deferred employee Social Security taxes (Line 23).
What if an employee quits or is terminated?
The Notice does specifically address what happens if an employee’s employment is terminated before the deferred Social Security tax is recovered. The Notice says “[i]f necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.”
This should mean that the employer may withhold the appropriate amount of social security taxes from the last paycheck for an employee who is no longer employed. It also appears to mean that if the employer fails to withhold sufficient Social Security tax from the employee, the employer is responsible for the shortfall.
For example, the final payroll for a departing employee may be insufficient to fully satisfy the employee’s obligation for the employee share of Social Security tax.
President Trump has said he hopes to “terminate” the tax, which funds Social Security and Medicare, so workers see a boost to their weekly checks and aren’t required to pay it back later. But absolving Americans of these debts requires an act of Congress.
Only time will tell if Congress can agree on this change. If they do change, employers who opted to continue withholding the tax, would then find themselves in the unenviable position of their employees having paid more tax then they were required to.
Taxpayers are seeking recommendations whether they should implement the deferral. Please note that there are advantages and disadvantages of the deferral.
The advantage is employees receiving Applicable Wages should see higher net paychecks paid through the end of the year.
The disadvantages or challenges, however, are significant. The challenges include difficulties in administering the deferral, the greater burden that will be placed on employees next year, the short-term nature of the deferral (i.e., a four month deferral), and the risk the employer may not be able to recoup the deferred amount from those employees that quit or are terminated before the entire amount of deferred taxes is collected.
A number of business groups, including the U.S. Chamber of Commerce, have said they expect most businesses will not implement the deferral because of the challenges.
Please note that these topics are general in nature. Please contact us to discuss how these new rules apply to your specific situation.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He’s also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at email@example.com.
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