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  • Employee Payroll Tax Deferral

    On August 8, 2020, the President of the United States issued a Presidential Memorandum directing the IRS to defer the withholding, deposit and payment of the employee portion of Social Security tax. The memorandum puts an obligation on employers to defer the employee portion of Social Security tax withholding on paychecks dated from September 1, 2020 through December 31, 2020, and then collect those taxes back from the employee pro-rata from January 1, 2021 through April 30, 2021.

    On August 28, 2020, the IRS published Notice 2020-65 (the “Notice”) telling us their interpretation of what employers need to do. Our payroll software does not provide a simple way for us to implement, and I am guessing that yours doesn’t either. When you read the Notice (see link below) note that “Affected Taxpayers” are not employees, they are employers. “Applicable Taxes” are the employee share of social security tax (not Medicare tax) or the railroad retirement tax equivalent. The employer is not given the right to opt out – this is mandatory on the employer.

    A couple lines in the Notice make me nervous, such as “…interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes” and “If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee”. Presumably, an employee could rack up some deferred Social Security tax, then leave your employ before or during the pay-back period. That could leave the employer stuck with interest, penalties, and additions to tax. Besides that risk is the cost of administrative work required to track each employee’s deferral and payback, making sure those amounts agree with EFTPS payments and Form 941 filings.

    Here is how we are going to do it here. We want our employees to have the right to receive extra cash now and pay it back later. We also want our employees to have the right to pay the tax now instead of January through April, when their cashflow may be even tighter. We will allow each employee to sign a letter waiving their right to the deferral of withholding. If someone chooses not to waive that right, we will withhold and pay the taxes just like normal. We will then cut them a payroll advance check for their Social Security tax withholding amount with the written understanding that the advance will be deducted from their paycheck four months down the road. If someone leaves before the payback is complete the unpaid advance will be deducted from their paycheck. While this solution may require extra cash from the employer, we believe the cost will be lower than the administrative burden incurred otherwise, let alone the risk of future “interest, penalties, and additions to tax”.

    This position is not authoritative, and doesn’t take into account the potential that the deferred withholding may be forgiven at some time in the future. If you find this helpful, or if you have differing ideas about how this can be handled please let us know.

    See IRS Notice 2020-65 here: https://www.irs.gov/newsroom/guidance-issued-to-implement-presidential-memorandum-deferring-certain-employee-social-security-tax-withholding


    Russ Anderson | 09/03/2020