On August 8, 2020, President Donald Trump issued a memorandum directing the Treasury Secretary to defer the collection of the employee portion of Social Security taxes (listed as “OASDI” on the paystub) but left many questions on the details on implementing this deferral unanswered. The Memorandum directed the Department of Treasury to issue guidance that would allow employers to defer the withholding and payment of the employee portion of Social Security taxes.
IRS has now issued guidance making clear that employers have the option to defer withholding the employee portion of Social Security taxes from their employees' paychecks issued between September 1, 2020, and December 31, 2020, but are not required to do so. However, employers will be liable for any tax, penalties, and interest for any Social Security tax deferred if not paid to the IRS by April 30, 2021.*
Payment of Deferred Taxes
On August 28, 2020, the IRS published implementing guidance clarifying that that employers may defer withholding the 6.2% employee portion of the Social Security tax for certain wages paid to employees between September 1, 2020, and December 31, 2020. Social Security tax applies to wages and compensation paid up to the annual wage base limit, which is $137,700 for 2020. The obligation for these taxes are divided equally between employers and employees at 7.65 percent (6.2 percent for Social Security and 1.45% for Medicare). However, employers are responsible for withholding and depositing with IRS the employee’s share from wages.
The Notice provides that employers must withhold and pay the taxes that the employee deferred "ratably" from wages and compensation between January 1, 2021, and April 30, 2021. While the Notice states that employers may "make arrangements to otherwise collect the total [deferred taxes] from the employee," if necessary, it does not state what those arrangements may be.
The Notice is also silent on how employers and employees may report and pay the deferred tax, so employers and employees must hope that the IRS will release additional guidance or publish revised forms to account for the deferred taxes.
Employers who fail to pay the deferred taxes before May 1, 2021, may be subject to interest, penalties, and additions to tax with respect to any such amounts outstanding.
In conclusion, employers should proceed cautiously before electing to defer payment of Social Security taxes as permitted under the Notice. The U.S. Chamber of Commerce says that the President’s executive directive is unworkable and many of its members will likely decline to participate because of the difficulties of administering the deferral and because it saddles employees with a large tax bill in January 2021. Employers are advised to consult their accountant and/or tax advisor before electing to participate in the Social Security tax deferral program to ensure compliance with tax obligations.
*The deferral of the employee portion of the Social Security tax is different, and should not be confused with, the deferral provided by the CARES Act, which allows employers to defer payment of the employer portion of Social Security taxes through the end of 2020 and to pay such deferred amounts by the end of 2022.
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