Treasury, IRS Release Guidance on Employee Social Security Tax Deferral

The Treasury Department and the IRS have issued guidance on the recent order by President Trump to defer the withholding, deposit, and payment of certain employee payroll tax obligations on wages paid from September 1, 2020 through December 31, 2020 (Notice 2020-65).  The order issued by President Trump was the subject of a prior article posted on August 18, 2020.

Under the guidance:

• The due date for the withholding and payment of the employee’s portion of the FICA taxes (6.2% portion of the federal payroll tax on employees, including the Railroad Retirement equivalent) are postponed until the period beginning on January 1, 2021 and ending April 30, 2021; and
• The deferred taxes must be withheld and paid from wages and compensation between January 1, 2021 and April 30, 2021.

The guidance does not separately postpone the deposit obligation for employee FICA taxes.  This would mean that if an employer does withhold employee FICA taxes from their wages, the employer would need to deposit those taxes at the same time as the other taxes withheld at the time they are required to be deposited.

Since the notice provides that the employer is to withhold the tax from the employees from whom the withholding was deferred, this assumes that the employee will remain an employee during period from January 1, 2021 to April 30, 2021, and that the employee’s paychecks will be large enough to absorb the additional withholding.  Employers may make “other arrangements” to otherwise collect the total FICA taxes deferred from the employee, but it is not clear what this means.

Nothing in the notice appears to require the employer cease withholding FICA taxes from an employee’s wages.  The ultimate liability falls on the employer to remit any FICA taxes that were deferred.

The deferral applies to wages paid to an employee on a pay date during the period beginning on September 1, 2020 and ending on December 31, 2020 only if the wage amount paid for a bi-weekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods.

The wage determination is made on a pay period-by-pay period basis.  If the amount of wages payable to an employee for a pay period is less than the threshold amount, then that amount is considered qualifying wages for the pay period and eligible for the deferral.  The wage amount considered would be for that pay period only and would not take into consideration wages paid to the employee for other pay periods.  Thus, it is possible an employee with wages over $104,000 for the year could qualify for deferral in any bi-weekly pay period where their wages are below $4,000.

Example: Luke is an employee of ABC, Inc. and has an annual wage of $75,000, which is paid on the 15th and last day of each month, i.e., $3,125 per pay period. Since his bi-weekly pay is less than $4,000, he is eligible for the FICA tax deferral. Assuming ABC, Inc. chooses to implement the deferral, his net paycheck would increase by approximately $194 for each pay period during the September 1, 2020, through December 31, 2020, deferral period (6.2% of $3,125). Luke’s total FICA tax deferred would be approximately $1,552, which ABC, Inc. would recover via additional FICA tax withholding from Luke’s paychecks during the period January 1, 2021, through April 30, 2021. Assuming Luke’s annual wage in 2021 is still $75,000, he would have $388 of FICA tax withheld during the January 1, 2021, through April 30, 2021, pay periods ($194 of normal FICA tax withholding plus ratable portion of the $3,125 in deferred FICA tax withholdings from 2020).

What is unclear is whether giving employees the choice of having or not having the FICA taxes deferred based on their having $4,000 of bi-weekly qualifying wages will be allowed.

Prior to stopping the FICA withholding employers should consult with their payroll provider and their tax advisor regarding the implementation of this executive order. Employers should also consider their communication to employees on the employer’s decision of whether to participate in the deferral.  There may be some employees that do not fully understand this is only a short-term deferral, and any increase they see in their paychecks now would be offset by a similar decrease during January-April of 2021.

Update posted on 9-8-20:

Deferring the employee portion of the FICA tax is optional the IRS confirmed during the agency’s monthly payroll industry teleconference.  Employers, and not employees, have the controlling choice of whether to implement deferrals of the employee portion of the FICA tax.  If an employee wants their portion of the FICA tax to be deferred but the employer does not want to go ahead with the deferral, the employer would not be obligated to put the deferral into place.