On August 8th, the President issued an Executive Order directing the Treasury department to defer the withholding, deposit, and payment of the employee-side Social Security (SS) payroll taxes otherwise due on wages or compensation, as applicable, paid during the period of September 1, 2020, through December 31, 2020 (the “Payroll Tax EO”). Thereafter, many employers were scrambling to figure out if/how they should/must implement this Payroll Tax EO. As a reminder, this guidance is distinct from the Congressionally enacted provision included in the CARES Act that allowed employers, at their discretion, to delay payment of employer-side SS payroll taxes due through December 31, 2020 (such deferred taxes being due in two installments: 50% by December 31, 2021, and 50% by December 31, 2022).
While some informal guidance on how the Payroll Tax EO will be implemented came in the form of commentary from Secretary Mnuchin, it left open questions on the basics of how this will work. Late Friday, the Treasury released guidance implementing the Payroll Tax EO in the form of a three-page notice; it comes just days before Tuesday’s start date of the deferral period.
Here’s a summary of what we now know:
Who: The deferral is available with respect to any employee whose wages or compensation during any bi-weekly pay period (26 periods/year) generally are less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods. That threshold translates to anyone making less than $104,000 a year. Note that an employee with varying compensation may be eligible in certain pay periods (when compensation payable for a pay period is less than the corresponding pay period threshold amount) and not others.
What: It is our interpretation that employers are not required to withhold SS payroll taxes from their employees’ paychecks through the end of the year. While the text of this notice is not explicit as to whether this is intended as a mandate or an optional decision for employers, earlier comments by Secretary Mnuchin indicated that this is intended to be optional for employers. While this optional element may be welcomed by employers, we note that absent the withholding requirement, however, it is unclear whether some state wage laws might apply to effectively prohibit withholding during the deferral period (a discussion that is beyond the scope of this alert).
When: The optional deferral is available for the final four months of 2020 (September-December 31, 2020) (the “Deferral Period”). To pay the amounts that were deferred, the amount of SS payroll taxes withheld from employees’ paychecks would increase from January through April 2021 (the “Recovery Period”). Interest and penalties will only begin to accrue on May 1, 2021, with respect to any unpaid taxes not paid during the Recovery Period. At this time, it appears that employers are required to pay in the withholding that is not collected during the Deferral Period regardless of whether they are able to collect it from their employees during the Recovery Period. This creates serious concerns (and unknowns) for situations in which employees terminate before the withholding is recovered.
Why: The known goal of the Administration is to defer certain payroll tax obligations with respect to certain workers through year-end while the pandemic ensues. The media has reported that many companies are expected to opt out of participating in the SS tax deferral. Reasons to skip the employee-side SS payroll tax deferral may include avoiding:
- the complexity of implementing a payroll tax deferral on short notice,
- the possibility of “saddling” employees with additional tax liability in 2021 (doubled up withholding in the Recovery Period), and
- risking the transition of liability to the employer. The Treasury’s guidance puts the responsibility on employers to pay back deferred taxes, many may not want to take on the additional risk of doing so.
While some guidance is better than no guidance, this is not a simple matter. At a minimum, employers should review applicable state wage laws to ensure that they can choose to withhold during the Deferral Period even though withholding is not currently required.