Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services
On August 8, 2020, President Trump signed a series of executive orders. One of those orders authorized the Treasury Secretary to issue guidance to allow employers to defer the withholding and payment of the employee share of Social Security taxes from September 1 through December 31, 2020. This withholding is 6.2% of gross wages, subject to a wage cap of $137,700 in 2020. Stated simply, this means that employees will have no Social Security withholding for the last four months of 2020, but will have to repay the deferred amount by April 30, 2021, presumably by doubling the normal withholding in the first four months of the year.
On August 28, 2020, Treasury released Notice 2020-65 to implement this directive, which takes effect on September 1, 2020. The provision intends to boost the U.S. economy stalled by the coronavirus pandemic, allowing wage-earners more money to spend immediately.
The executive order includes language that the federal government will pursue the possibility of forgiving the deferred taxes, rather than requiring them to be paid back in 2021. This will take legislative action in Congress.
The guidance has been the subject of disagreement between the Treasury Department and the White House, leading to delays in releasing the rules. Because of the delay, as a practical matter, very few companies or payroll providers are ready to implement this change to stop withholding from paychecks on September 1.
To qualify for the deferral, workers must earn less than $4,000 every two weeks, which amounts to about $104,000 per year. An individual earning $50,000 would owe roughly $1,073 in deferred taxes next year. Someone earning $104,000 – the maximum income to which the deferral applies – would owe $2,232. In the event that an employee terminates employment during the deferral or payback period, and the amounts cannot be recouped from a final paycheck, the employer will be responsible for paying the tax. This is a factor for businesses to consider in determining whether to implement Notice 2020-65.
Implementing this tax deferral is not mandatory; the choice belongs to the employer. As a practical matter, the relatively short-term deferral may not be significant enough to warrant the administrative efforts for implementation. Further, at this time, it is undetermined whether Congress will take action to enact a forgiveness provision.