IRS Issues Notice Providing Guidance on the Deferral of Employee Social Security Withholding

The IRS and Treasury issued initial guidance Notice 2020-25 in order to effectuate the President’s Executive Order permitting a deferral of employee payroll taxes effective September 1. The Treasury Secretary is using his authority under IRC sec 7508A to defer the payment of taxes due when there is a federal declared disaster.

Under the initial guidance:

• Relief is provided to employers that are required to withhold and pay the employee share of social security tax or the railroad retirement equivalent. The employer is considered the “affected taxpayer,” and the due date for both the withholding and payment of the tax for “applicable wages” is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. (In a footnote, the Notice states that the obligation for employee social security tax does not arise until the tax is withheld. This delays the employer deposit obligation on the applicable wages until the tax is withheld.)
• Applicable wages are defined by the Internal Revenue Code as wages or compensation paid to an employee on a pay date during the period beginning September 1, 2020, and ending December 31, 2020, only if such wages or compensation paid for a bi-weekly period are less than $4,000. This is determined on a pay period-by-pay period basis. (An employee may qualify for certain pay periods but not for others where wages are not paid evenly). Compensation excluded from FICA and Medicare wages or Railroad Retirement Transportation and Medicare wages are not counted toward the $4,000 threshold.
• The employer must withhold and pay the deferred payroll taxes ratably from amounts paid to the employee between January 1, 2021, and April 31, 2021. Otherwise interest, penalties and additions to tax will begin to accrue on May 1, 2021, with respect to unpaid applicable taxes. The Notice provides that the employer can make arrangements to otherwise collect the total applicable taxes from the employee.

Marcum Commentary

The relief is provided to the employer and not to the employee. The relief is upon the obligation of the employer to withhold the tax (and consequently deposit the tax). The deferral of the obligation to deposit results from the deferral of the obligation to withhold until 2021.

The Notice leaves many practical questions unanswered. It is unclear whether an employer must defer these taxes or whether this rule is elective. The language of the Notice suggests that it is elective, but we must await for future guidance on this issue. Employers and business organizations have expressed concern that the deferral will cause a large tax obligation on the covered employees in the first quarter of 2021. Additionally, there are questions as to the employer’s liability should the employee leave employment or if there are insufficient net funds payable to the employee from which to collect the additional withholding.

The IRS has issued a draft of a revised Form 941 including lines to report the employee deferred tax. Instructions should be issued which address these open matters.

If you have any questions on this new provision, contact your Marcum tax professional. For questions related to this Tax Flash, please contact your Marcum tax advisor or Michael D’Addio at 203.781.9665 or email Michael.