On 8 August 2020, President Trump issued a presidential memorandum, providing that employee-side social security taxes could be deferred from 1 September through 31 December 2020. Subsequently, on 28 August 2020, the Internal Revenue Services (IRS) released Notice 2020-65, to provide guidance on how to implement the President’s Order.
While the IRS’s guidance is succinct and leaves many questions unanswered, it broadly explains that deferral of these taxes is voluntary, at the behest of the employee. In addition, it clarifies that:
- Only employees earning less than USD 4,000 bi-weekly (or the equivalent over other pay periods, e.g., USD 2,000 per weekly pay period, USD 4,333 per semi-monthly pay period) may participate in the deferrals. This excludes remuneration that does not constitute “wages” for purposes of FICA taxes;
- Deferral eligibility is determined on a pay-period to pay-period basis; if an employee’s compensation drops below the threshold for a pay-period, withholdings can be deferred for that period;
- The deferred taxes subsequently must be withheld from an employee’s pay for the period from January 1 through 30 April 2021 (e.g., the employee will have double withholdings during that time period);
- Employers will be responsible for paying the deferred taxes and may be subject to penalties if they fail to do so; and
- Employers may make “arrangements” with employees who elect to defer their withholdings in order to ensure repayment. The guidance does not explain what such “arrangements” consist of, but presumably this includes repayment agreements with deferring employees to address situations such as where an employee is terminated prior to full repayment.
Employers should continue to monitor these developments over the coming months, as additional guidance and clarity may address many of the outstanding questions that employers may have.