Late Friday, the IRS released its much-anticipated guidance (Notice 2020-65) on the implementation of the President’s August 8, 2020 Executive Order (EO) directing the Secretary of the Treasury to take steps to defer the withholding, deposit, and payment of the employee’s share of OASDI taxes and railroad retirement taxes. Our previous discussion of the EO can be found here.

The Notice provides a grace period for the withholding and payment of the employee portion of Social Security taxes on certain wages paid between September 1, 2020 and December 31, 2020. Withholding and payment may be deferred until the period between January 1 and April 30, 2021. To qualify, an employee’s Social Security wages must be less than $4,000 in a biweekly pay period, or the equivalent in a period of different length, determined on a pay period by pay period basis. 

A&M Insight: While Notice 2020-65 explicitly provides that the determination of eligibility is made on a pay period by pay period basis, it does not address the situation where an employee works for multiple employers. As a result, it appears that an employee who works for multiple employers and earns less than $4,000 from an employer in a biweekly period may still qualify for the relief with respect to wages paid by that employer, assuming the employer offers the deferral.  There does not appear to be any limitation based on the total wages paid to an individual employee by multiple employers.

If an employer chooses to take advantage of the grace period, then it must withhold and pay the postponed taxes “ratably” from wages and compensation paid between January 1 and April 30, 2021.  Accordingly, under the Notice, the postponed amounts may eventually be withheld from the paychecks of the affected employees, as long as they remain employed by the same employer.  Postponed taxes will begin to accrue interest and penalties if not paid before May 1, 2021.

A&M Insight: It is important to note that Notice 2020-65 does not shift the obligation to deposit the employee portion of Social Security taxes from the employer to the employee. Notice 2020-65 generally assumes that the employee, whose taxes were deferred, will still be an employee through April 30, 2021 and their paycheck will support the additional deduction for the deferred taxes.  To address the possibility that this is not the case, it provides that employers “may make arrangements to otherwise collect the total Applicable Taxes from the employee.”

However, what measures an employer can take may be subject to state law restrictions, as well as collective bargaining arrangements. Additionally, it should be considered whether these arrangements must be agreed upon before implementing the deferral.

However, Notice 2020-65 does not require employers to change any of their payroll practices; thus, employers are not required to implement the deferral and may continue to withhold Social Security taxes from wages paid during the grace period. 

A&M Insight: An employer who does withhold during the grace period must deposit the withheld taxes on the normal schedule.  The relief provided by the CARES Act (postponing payment of the employer’s share of payroll taxes) does not apply to amounts withheld from employees.  

Although the White House has said it wants Congress to forgive the employee portion of Social Security taxes accruing during the grace period altogether, few observers in or out of government think that Congress will do so.  As a result, appreciating the implications of the EO and Notice 2020-65 is of the utmost importance.

A&M Taxand Says

Notice 2020-65 answers a few questions that had been raised about the EO, but several unanswered questions remain.  Therefore, we expect that many employers will not implement the EO to defer collection of the employee portion of Social Security taxes, because they will be responsible for any unpaid amounts. With that said, if employers do choose to offer the deferral, they could make the deferral either mandatory or discretionary (which could pose a host of administrative issues for the employer). However, employees may prefer to continue to be subject to withholding, rather than endure an effective doubling of the tax in the first four months of 2021.

To address these issues, some employers may decide to absorb the cost of the deferred taxes, rather than subject employees to double withholding. It is important to bear in mind that any amount of taxes paid by an employer on behalf of an employee will constitute additional income and should be reported as such on Form W-2. Such payments should be subject to income tax and FICA withholding, and so the employer may have to gross-up its payments by the applicable withholding amount to hold employees harmless. 

A&M Taxand is happy to assist in analyzing whether to apply Notice 2020-65 and the potential considerations surrounding its implementation.