The IRS has issued Notice 2020-65 deferring the withholding and deposit of the employee’s share of Social Security (OASDI) taxes, or the railroad retirement tax equivalent, on applicable wages. Specifically, the deferral applies to applicable wages paid on a pay date between September 1, 2020, and December 31, 2020. The availability of deferral is based on the date the employee is paid. The date on which the wages were earned is not determinative.
The Notice explains that the regulations do not explicitly postpone the deposit obligation; however, they do postpone the withholding time for the employee payroll tax, which, by operation, delays the deposit obligation.
We broke down what the deferral of the payroll tax obligation means for you.
What Are Applicable Wages?
Applicable wages are the total wages and other compensation subject to payroll tax for the pay period. Compensation in excess of the Social Security wage base ($137,700) is not considered applicable wages and does not generate payroll tax eligible for deferral.
Who is Eligible for the Payroll Tax Deferral?
Deferral is only available if compensation is less than a threshold amount equivalent to $4,000 on a bi-weekly pay period basis. Equivalent threshold amounts would be $2,000 for a weekly pay period, $4,000 for a bi-weekly pay period, $4,333.33 for a semi-monthly pay period and $8,666.67 for a monthly pay period.
Each pay period is tested separately. The payment of bonuses and commissions affects only the pay period for which they are made. The threshold is a cliff-type calculation. If total wages and other compensation subject to payroll tax equals or exceeds the threshold for any pay period, none of the wages and compensation for that pay period are eligible for deferral.
Revisions to Form 941 have been made to accommodate the changes in reporting required by the payroll tax deferral.
Employee X receives a gross salary of $4,300 on the 15th and last day of each month. Employee X is eligible for payroll tax deferral with respect to each payday from September 15 through December 31, 2020. Although Employee X’s pay exceeds the $4,000 threshold amount in the Notice, it is less than the equivalent amount determined on a semi-monthly payroll basis.
Employee Y receives the same gross salary of $4,300 on the 15th and last day of each month, and also receives a $40,000 commission on October 31. Employee Y will not be eligible for payroll tax deferral for the pay period that is paid on October 31. In addition, because Employee Y’s year-to-date compensation (including the commission) will exceed the $137,700 Social Security base in the pay period paid on December 15, only $3,100 of the $4,300 total compensation paid on December 15 will be eligible for deferral. The remaining $1,200 of compensation paid on December 15 and the entire $4,300 of compensation paid on December 31 will not be subject to Social Security tax, and deferral will not be necessary.
What is the Employer’s Responsibility?
The employer is responsible for collecting and depositing any amounts that have been deferred. Withholding and deposit of such taxes is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. No interest or penalty will accrue on such taxes until May 1, 2021. Wage withholding is assumed to be the method by which an employer will collect the deferred tax, but the Notice provides that the employer may make arrangements to otherwise collect these amounts from the employee. This arrangement provision also appears to provide the employer with the opportunity to collect any tax deferred for an employee that leaves the employer prior to the assigned collection and deposit period in 2021 by means other than just withholding.
The Notice does not have specific language that addresses whether to allow an employer, or an employee, the option to elect not to participate in the payroll tax deferral. However, employers appear to have flexibility in deciding whether to participate in the deferral based on statutory language granting the government authority to delay certain actions under the tax laws in the case of a disaster such as the COVID-19 pandemic. Specifically, section 7508A, the section of the Internal Revenue Code referenced in President Trump’s August 8 memorandum directing the delay in withholding and payment of the employee share of social security taxes, authorizes the Secretary of the Treasury to extend certain tax filing and payment deadlines for up to one year “that may be disregarded” by employers. Consequently, employers are allowed to defer the withholding and payment of the payroll taxes on employees’ applicable wages, but not required to do so.
Employers have a number of factors to weigh when deciding whether and how to implement the payroll tax deferral. They will need to effectively communicate their decisions to affected employees.
WE CAN HELP