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.
