Finally, IRS provides guidance on the Social Security withholding holiday

Posted September 4, 2020

The Department of Treasury and Internal Revenue Service have finally issued guidance related to the President’s August 8 memo allowing employers to defer withholding and payment of an employee's portion of the Social Security tax if the employee's wages are below a certain amount. The tax is not withheld, so it is also not deposited to the IRS.

That doesn’t mean the IRS won’t want it in the future.

The guidance makes relief available for employers and generally applies to wages paid starting September 1, 2020, through December 31, 2020. Employers don’t have much time to act on the guidance.

The employee Social Security tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.

The Social Security tax that was deferred would be withheld between January 1, 2021 and April 30, 2021, so employees will still need to pay the tax, and employers will need to withhold it. They would simply get the bill for the deferred tax early next year. After April 30, penalties, interest, and taxes would begin to accrue. Employers may make arrangements to otherwise collect the total applicable taxes from the employee, but these arrangements are not identified or defined. If an employee does not pay the taxes, the employer may be on the hook. In the end, employers may not want to take on this responsibility.

The bill employees get come next year is nothing to sneeze at. If, for example, an employee makes $50,000 per year would have to pay up $1,073. Even if employers double the amount from January through April that would otherwise be withheld, the new deduction could cause some paycheck sticker shock. A draft revision of Form 941 has been created for this tax deferral.

Questions still remain. What if an employee leaves the company during the period of the deferral? Would an employer still need to pay the taxes the employee would have otherwise paid next year? Adjusting payroll systems could also require some consideration. Communicating all this to employees would also require some careful thought.

According to the guidance, employers are allowed to defer the withholding, so it appears they are not required to do so. The Executive Order, on the other hand, indicates that employers are required to offer the deferral to employees. Professionals dealing with employment tax seem to lean more toward it being voluntary. Employees, in turn, may choose to not have this tax withholding deferred. While some COVID-19 financial changes have forgiveness provisions, this latest one does not.

This article was written by Darlene Clabault of J. J. Keller & Associates, Inc.