The IRS, acting pursuant to a Presidential Memorandum dated August 8, 2020, issued guidance last Friday on implementation of the deferral of employee Social Security taxes. The deferral period will be September 1-December 31, 2020.
This guidance would allow employers to defer withholding of the employee’s portion of Social Security tax (6.2%); thus, increasing the employee’s take-home pay for four months. However, under current guidance, the deferred tax would need to be withheld and repaid “ratably” from January 1-April 30, 2021 in order to avoid “interest, penalties, and additions to tax.”
Deferral only applies to employees making less than $4,000 in a bi-weekly pay period (or, the equivalent amount for other pay periods).
Under the Memorandum, the Treasury Secretary is directed to explore avenues to eliminate the obligation to pay the deferred taxes; however, it appears that such a directive would require legislation.
Some challenges associated with the order and guidance are:
1. Employees that benefit from the temporary deferral will need to turn-around and pay double in four months, unless forgiveness is granted.
2. How are employers supposed to withhold deferred taxes for employees terminated during the deferral or repayment period? Will employers be “on-the-hook” for such amounts?
3. If employers do not implement deferral, and the deferral is later forgiven, is this fair to employees who continued to pay the Social Security withholding tax? If not, how is it made equitable?