The IRS last week provided additional clarity how employers can defer withholding and remitting employees’ Social Security taxes in response to President Trump’s executive memorandum.
We still recommend our clients continue to withhold and pay the tax. This deferral is ripe for problems for both the employee and employer.
For employers interested in learning more about the option, here is the new guidance from the IRS:
- The deferral applies to wages paid between September 1, 2020 – December 31, 2020.
- The deferral is only allowed if wages for a pay period fall under specified threshold that equates to an annualized amount of less than $104,000.
- For a bi-weekly pay period, threshold is < $4,000, ($104,000/26 pays).
- The threshold amount must be calculated for other pay frequencies (e.g., weekly pay threshold would be < $2,000).
- The deferral may be allowed for some pay periods and not others, depending on whether the amount for the pay period is under or over the threshold.
- Employers will be responsible for the repayment of the deferred taxes
- Repayment is to be made through ratable withholding increases from employee pay during the period January 1, 2021 – April 30, 2021.
- For any amounts not repaid through this increase in ratable withholdings, the employer will be subject to interest, penalties, and additions to tax beginning May 1, 2021.
- The employer may make other arrangements with the employee to otherwise collect the total taxes due.
No guidance is provided regarding special situations- i.e., an employee quits or is fired before the repayment period. Therefore, this remains a chief concern with why we don’t recommend doing the deferral.
The new information from the IRS also doesn’t address another outstanding question – whether the deferral was optional and, if optional, whether the employee or the employer would be responsible for making the decision to defer.
However, in a recent interview, Treasury Secretary Steven Mnuchin indicated that it was the employer’s election to defer the withholding and payment of tax for eligible employee wages. Furthermore, it appears that the deferral can be made on an employee-by-employee basis so it does not need to be an all-or-nothing approach.
More information on President Trump’s executive memorandum can be found in this previous article: Deferring Employee Social Security Taxes: Considerations for Employers to Weigh