All information in this COVID-19 Response Resource issue is effective as of September 1, 2020.
As employers are all too familiar, Social Security is funded by a tax paid partially by employers and partially by employees. The employee portion of the payment is made by employers withholding 6.2 percent of employees’ wages and remitting those funds to the federal government. On Aug. 8, 2020, President Trump issued an Executive Order directing the Treasury Department to defer collection of the employee withholding component of Social Security taxes for certain employees; namely, employees whose wages or compensation is “less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.”
At the end of the day on Aug. 28, 2020, the Treasury Department issued Notice 2020-65 (Notice) to implement the Executive Order. In that Notice, employers are still required to pay their portion of the Social Security tax for employees covered by the Executive Order. But instead of withholding and remitting the “employee side” of Social Security taxes to the federal government, the Notice allows employers, beginning Sept. 1, 2020, and continuing through Dec. 31, 2020, to pay the money to employees.
The Notice clarifies that the Social Security deferral is limited to withholdings made in an employee/employer relationship. Self-employed individuals will not benefit from the deferral. However, wages paid to S Corporation shareholders may qualify or other relationships where the employer is required under federal law to withhold Social Security taxes.
The Notice is only three pages long and leaves significant uncertainty around implementation of the Notice. We expect the Treasury Department to issue additional guidance as the Notice goes into effect Sept.1, 2020. Pending further guidance, below are some steps employers should consider taking now:
1. Determine Which Employees are Affected. The Notice states that Social Security withholding will only be deferred for employees whose bi-weekly wage is less than $4,000. That wage would not include most health and retirement plan payments by employers. An “equivalent amount” is to be used for other pay periods. The thresholds are applied pay period by pay period (in other words, employees may qualify for the deferral in some pay period and not others, depending on the amount of their compensation for such pay period). Employees whose pay exceeds the applicable threshold must not have their Social Security withholding deferred.
2. Advise Employees Regarding the Deferral. Simply stated, the deferral is a four-month interest-free loan to employees of 6.2 percent of their wages. Absent further Congressional action, employees must “pay back” the loan. Payroll deductions that are not made Sept. 1, 2020, through Dec. 31, 2020, must be made Jan. 1, 2021 through April 30, 2021, or penalties and interest will apply. However, the Notice places the payback obligation on employers. This will create significant implementation challenges for employers. Employees should be advised that, as of now, the decrease in withholding amounts from their paychecks is not a tax cut but a deferral and, absent further Congressional action, the deferral will be “paid back” through increased withholdings from the employee’s paycheck beginning Jan. 1, 2021, through April 30, 2021.
3. Create a Plan for Departing Employees. The Notice contains a single sentence that employers may “if necessary … make arrangements to otherwise collect the [deferred tax] from the employee.” This may give employers the ability to make deductions from an employee’s final paycheck who is departing the company before the deferral can be fully repaid. However, any such holdback could run afoul of the Fair Labor Standards Act and state wage and hour laws. Employers may also consider requiring employees to agree to “pay back” the deferred Social Security withholding amounts that must be paid in 2021 (for example by a promissory note) if the employee’s employment is terminated prior to April 31, 2021. We anticipate the Treasury Department will provide further guidance on this issue.
For further questions about this or related issues, contact Sean Monson by calling (801) 536-6714 or send an email to firstname.lastname@example.org or Ross Keogh by calling (406) 206-9710 or send an email to email@example.com.