IRS Notice 2020-65 Regarding Employee Social Security Tax Deferral
On August 28 of 2020, the IRS released a notice regarding the Employee Social Security Tax Deferral. While you can find the full notice here, it may be difficult to read and understand. For this reason, we have provided the following highlights and key ideas to consider. First, they are certain terms that the notice uses to determine who is affected that may not be clear. For instance, when the document reads “affected taxpayers,” it is referring to employees that are required to pay or withhold the employee share of social security tax (IRC 3102(a)) or RRTA tax (3202(a)). Additionally, the document’s “applicable wages,” are IRC 3121 (a) wages (SS and Medicare wages)) paid to an employee during the pay period between September 1, 2020, and December 31, 2020. These wages are only applicable if the amount of these wages paid for the biweekly pay period is less than the threshold amount of four thousand dollars or the equivalent threshold for other pay periods. Notably, determining which wages are applicable is based on a pay-period-by-pay-period basis.
This IRS notice is equally as important to both employees and employers. The notice indicates the type of wages and compensation covered and places the burden on the employer to withhold and pay back the deferred amounts next year. The due date for Affected Taxpayers (employers) for the tax is postponed until the period between January 1, 2021, and April 30, 2021. Employers must withhold and pay the total deferred taxes “ratably from wages paid between January 1, 2021, and April 30, 2021.” On May 1, 2021, interest, penalties, and additions to tax will begin to accrue with respect to any unpaid taxes. If necessary, the employer may make arrangements to otherwise collect the total taxes from the employee.
Although this notice has been published, there are still major questions that the document left unanswered. Among these unanswered questions is what employers should do if employees defer taxes but leave the company before the start of 2021. This also applies to seasonal employees that may not be receiving a paycheck in 2021 and will therefore be unable to recoup the taxes.
Importantly, although the deadline for payment of these taxes is delayed until 2021, Steven Mnuchin, Treasury Secretary, has deemed participation optional for any given company. Because of the uncertainty and unanswered questions regarding repayment terms and the effect it may have on employers and employees, Zetter HealthCare will not be recommending that companies participate in these deferrals at this time.