On August 8, 2020, President Trump issued a memorandum directed toward providing “further temporary relief … to support working Americans” by enabling the deferral of employee Social Security taxes for specific individuals.
Specifically, the “Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster” directs the Secretary of the U. S. Department of the Treasury to defer the withholding, deposit, and payment of the employee component of Social Security on wages paid during the period of September 1, 2020, through December 31, 2020.
This deferral is to be made available only to employees whose biweekly compensation is “generally … less than $4,000, calculated on a pre-tax basis.” The equivalent in other payroll frequencies is $2,000 weekly; $4,333.33 semi-monthly; and $8,666.66 monthly. Any amounts deferred in accordance with this memorandum will not be subject to either penalties or interest.
Further Clarification is Needed
The IRS may also need to clarify whether employers would be expected to adjust the deferral as employees fluctuate above and below the limit.
Another question is whether the deferral applies strictly to wage income. For example, employees may be eligible for the deferral based on wages, but they may have significant non-wage income, which could disqualify them from the deferral.
The Secretary of the Treasury is instructed to issue guidance to implement the memorandum and to “explore avenues, including legislation, to eliminate the obligation” for taxpayers to repay the deferred taxes.
Additional guidance is still required from the Secretary of the Treasury and/or the IRS on how to implement the deferral.
Possible Employee Concerns
The memorandum does not include any deferral of the employee portion of Medicare tax or federal income tax.
Employees may be concerned that they may have to repay the deferred tax amounts, though there is no clarity on when (if ever) such a repayment would be required.
Currently, it remains unclear if employers may be subject to penalties for failing to withhold the employee component of Social Security taxes. During an employment tax audit, employers are obligated to pay any unpaid taxes to the IRS.
If implemented, the relief provided in the memorandum would be in addition to that given under Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which made allowances for the deferral of the employer portion of Social Security taxes.
The IRS will need to advise employers if there will be reporting requirements associated with the deferral. Employers may need to separately report qualified Social Security wages paid during the deferral period on the Form W-2 and Form 941, and possibly other information.
Employers will need to pay attention to updates concerning the rights and responsibilities put forth by this memorandum as more information and guidelines become available.