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Tax Updates

Employee Social Security Tax Deferral Update – 09-01-2020
Employee Tax Deferral Agreement

 

BACKGROUND AND OPINION

On August 8, 2020 President Donald Trump released a Presidential Memorandum that suspends the requirement to withhold and deposit Social Security taxes from employee paychecks during the period September 1, 2020 through December 31, 2020. The IRS issued Notice 2020-65 on August 28, 2020 that provided some additional guidance related the Presidential Memorandum but many questions remain unanswered.

The new guidance does not provide additional information related to an employer’s requirement to make the deferral available to employees. Employer elective participation does not appear to be an option based on the language in the Presidential Memorandum, however Treasury Secretary Steven Mnuchin stated in an interview with Fox News on August 12, 2020 “you can’t force people to participate”.

Based on the construction of the Presidential Memorandum, we do not believe that the deferral of withholding Social Security taxes from employee paychecks is elective at the employer level. Specifically, Section 2(a) of the Presidential Memorandum states the deferral SHALL BE made available to any employee whose wages are under the limitations referenced in the Presidential Memorandum. Additionally, the AICPA is recommending that employers require employees to make a written election regarding their desire to participate or not to participate in the Social Security tax withholding deferral.

The deferral of the withholding of Social Security taxes from employee paychecks is the equivalent of a short-term, interest-free loan. Employees will be required to repay the loan via additional payroll withholding beginning in January 2021. Employers are required to collect and deposit this repayment based on Notice 2020-65. The Presidential Memorandum does not specifically state that employers are responsible for repaying employee deferrals but this is implied under the employer responsibility to withhold and deposit taxes statutes.

NOTICE 2020-65 ADDITIONAL GUIDANCE

Notice 2020-65 provides additional guidance related to employee wage limitations and the Social Security tax withholding deferral. Employees earning less than $4,000 bi-weekly (or $2,000 per week) are eligible to participate in the deferral. This test is applied each pay period so it is possible for any employee to qualify for the deferral during some pay periods and not others.

Employees will be required to pay back the Social Security taxes deferred starting on January 1, 2021 via additional withholding. This will result in employers withholding an additional 6.2 percent from each paycheck until the deferral is repaid. The deferral must be paid back by April 30, 2021 or interest and penalties will be incurred. It is unclear what mechanisms are available to employers for penalty and deposit relief if employers cannot recover the required repayments from terminated employees.

RECOMMENDATIONS

1. IMPLEMENT THE SOCIAL SECURITY WITHHOLDING DEFERRAL PROCESS AS SOON AS PRACTICAL

The Presidential Memorandum applies to wages paid on or after September 1, 2020. The Presidential Memorandum also instructs the Treasury Department to issue additional guidance. This guidance was not issued until August 28, 2020. The federal government will not be implementing the withholding deferral program for government employees until late-September.

2. REQUIRE EMPLOYEES TO COMPLETE A DEFERRAL ELECTION FORM

Completion of the deferral election form will place the decision to defer on the party that is primarily liable for the repayment of the tax. A sample election form is located at the top of this section.

ADDITIONAL COMMENTS

It is not explicitly clear that employers are required to provide employees with the opportunity to defer the withholding of Social Security taxes. It is also not clear what potential penalties could be incurred if it is definitively determined that employers are required to offer the deferral to employees and they do not. IRS penalties related to employee tax withholdings are based on untimely withholdings and/or deposits. There are no penalty schemes based on early withholdings.

Notice 2020-65 requires employers to withhold and deposit the deferral of payroll taxes from employee paychecks beginning January 1, 2021. It is unclear if employers can ultimately be responsible for the repayment of employee deferrals if the funds cannot be recovered from employee paychecks. It is possible that the current withholding and deposit statutes could be interpreted as requiring an employer to pay the entire deferral plus interest and penalties if funds cannot be recovered from terminated employees.

Third Quarter 2020 Estimated Tax Payments

Third quarter estimated tax payments are due on September 15, 2020. Estimated tax payments can be based on current year income or your 2019 tax liability. Corporations cannot use the prior year tax calculation if the prior year tax liability was zero.

In prior years, many taxpayers used the prior year’s tax liability as a basis for making current year estimated tax payments. This method is simpler and more convenient than calculating required estimated tax payments based on the current year income. The prior year tax liability method may not be the best approach if your income has declined in 2020. A taxpayer may choose to use the method of calculating estimated tax payments that results in the lowest payment.

Many of our clients are already on our list to review the third quarter estimated tax payment based on year-to-date income. If we have calculated your estimated tax payments based on prior year’s tax liability in the past, please contact us if you believe that the year-to-date income calculation might result in a lower estimated tax payment because your 2020 income is less than 2019.

Employee Payroll Tax Deferral (08-25-2020)

Via a Presidential Memorandum, President Donald Trump has suspended the requirement to withhold and deposit Social Security taxes from employee paychecks for employees earning gross pay of less than $2,000 per week. The deferral is applicable for the period September l, 2020 through December 31, 2020 and will increase the net payroll of employees by 6.2 percent.

The suspension of Social Security tax withholdings is a deferral. If legislation is not enacted to forgive the deferral, employees will be required to payback Social Security taxes that were not withheld from their paychecks. (Presumably, this will be repaid when individuals file their 2020 tax return).

A copy of the Presidential Memorandum can be access here:

Memorandum

An AICPA podcast related to the employee payroll tax deferral can be access here:

Podcast

Deferral of Employer Payroll Taxes

The payment of employer payroll taxes incurred during the period March 27, 2020 through December 31, 2020 is deferred. The deferral includes one-half of self-employment taxes that are traditionally paid via estimated tax payments.

One-half of the amounts deferred are due by December 31, 2021 and the remaining one-half must be paid by December 31, 2022. Taxes withheld from employee paychecks are still due using the regular employer tax deposit rules.

Economic Impact Payments

Each taxpayer is entitled to a $1,200 check under the COVID-19 CARES Act. Married taxpayers are entitled to a $2,400 check. Taxpayers are also entitled to a $500 check per qualifying child. Generally, a qualifying child is a taxpayer’s child under the age of 17. Dependent children are not eligible for the credit.

Check amounts will be reduced for single taxpayers with adjusted gross income between $75,000 and $99,000 and for married taxpayers filing jointly with adjusted gross income between $150,000 and $198,000. Single taxpayers with adjusted gross income in excess of $99,000 and married taxpayers filing jointly with adjusted gross income exceeding $150,000 will not receive a check.

Your check amount will be based on your 2018 tax return unless your 2019 tax return has been filed and processed by the IRS. You are not required to file your 2019 tax return to receive a check.

You can check the status of your payment and enter electronic refund information by using this link.

IRS payment

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