Treasury Releases Guidance on Social Security Tax Deferral

On August 28, the Treasury released guidance in response to the President’s Executive Order allowing employees to defer their 6.2% portion of social security tax (i.e., FICA) or railroad retirement tax. This deferral does not apply to Medicare or federal income tax withholding.

In Notice 2020-65, the Treasury places the responsibility on employers to delay this withholding on all “applicable wages.” It also requires employers to ensure the repayment of the deferred payroll tax.

Applicable Wages

Applicable wages are employee wages or compensation paid beginning on September 1, 2020 and ending on December 31, 2020 that amount to less than $4,000 on a bi-weekly pay period or the equivalent in other pay periods. If an employee’s pay is greater than this amount, they are not eligible for the deferral.

This determination will be made on a period-by-period basis.  Wages under the threshold in one pay period are eligible for deferral, even if wages are above the threshold (and therefore ineligible) in a different pay period.

Employer Obligation

The due date for an employer to withhold the applicable taxes is postponed to the period between January 1, 2020 and April 30, 2021. Employers have the option to “make arrangements to otherwise collect” the deferred tax from employees (e.g., those who leave the company), but the payment of the deferred tax is ultimately the obligation of the employer. Employers must pay all withholding deferrals by May 1, 2021.

Observations

It is unclear whether employers must or may allow employees to defer this withholding. In addition to the burden placed on employers to delay the withholding and ensure the taxes are repaid, employees would also face a potential hardship of double withholding of the 6.2% tax for the first four months of 2021.

Furthermore, employers willneed to determine how they will recover deferrals if an employee ceases their employment during the deferral or withholding recovery periods.

Grassi’s Tax Services advisors will keep you informed of any new guidance that is released.


Shashi Singal Shashi Singal is a Principal at Grassi and brings over 18 years of diversified tax and accounting experience to the firm. Her expertise lies in review of tax returns, research projects, tax planning and projections, assisting with mergers, acquisitions and corporate re-structuring. Shashi works with clients primarily in the manufacturing & distribution, wholesale and retail industries, law firms, architecture and engineering firms, real estate... Read full bio

Robert L. Tobey Robert L. Tobey, CPA is a Partner in the Tax Services practice at Grassi, where he guides clients through the complexities of tax planning and compliance on the federal, state and international levels. He specializes in helping pass-through entities, multi-state corporations, high-net-worth individuals and investors meet their business, tax savings and wealth preservation goals. Robert advises clients in a wide range of industries, with... Read full bio

Categories: Tax