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September 8th, 2020
Questions to Consider Before Deferring Employee Social Security Tax Payments
On August 28, 2020, the IRS issued guidance implementing the August 8, 2020 Presidential Memorandum allowing employers to defer withholding and payment of the employee portion of FICA (Social Security) taxes for certain employees. The Presidential Memorandum and the IRS guidance are clearly intended to put more money in workers’ pockets -- at least temporarily -- but the program raises important questions for employers. Here are a few to consider before make any changes.
- Which employees are covered? Payroll tax deferral under this program is only available for employees whose wages are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for employees whose wages are $4,000 or more for a bi-weekly pay period. This relief is available for wages paid from September 1 through December 31, 2020.
- Who decides? Because the deferral of any individual employee’s FICA tax withholding is not mandatory, the decision whether to defer is the employer’s to make. If an employee wants to defer FICA tax withholding, but his employer does not, the employer could refuse to do so. On the other hand, if the employer wants to defer FICA tax withholding but the employee does not, it seems that the employer nevertheless is free to do so. While this latter situation may be atypical, it is far from inconceivable and has generated a fair amount of discussion among business owners and practitioners. Employee relations may be the driving consideration.
- If we defer for one, do we have to defer for all? The IRS guidance is unclear about whether all similarly situated employees must be treated the same. In other words, if an employer defers FICA tax withholding for one of its employees whose bi-weekly wages are less than $4,000, must it do so for all of its employees whose bi-weekly wages are less than $4,000? Again, employee relations may be the key factor.
- What about the Medicare tax? The deferral applies only to the employee share of the FICA tax -- 6.2% of an employee’s wages up to $137,700. Medicare tax must still be withheld and deposited. The employer’s share of the FICA tax is already eligible for deferral pursuant to the CARES Act.
- When do we pay back deferred amounts? Any FICA tax deferred under this relief program must be withheld and paid ratably for pay periods between January 1, 2021 and April 30, 2021. For example, if an employee earns $20,000 the last four months of 2020 and his share of the FICA tax is deferred for that entire period, the employee’s take-home pay will increase by $1,240 during the last four months of 2020, but his employer will have to withhold that amount during the first four months of 2021, in addition to the employee’s share of the FICA tax on the wages paid to him during the first four months of 2021. Again, this relief is a payroll tax deferral, not a reduction or holiday, although it could become a permanent reduction in future stimulus legislation.
- What happens if an employee is terminated? What will employers do about employees who benefit from the deferral between September 1 and the end of 2020, but terminate employment before the deferred FICA tax has been repaid? The IRS guidance indicates that employers “may make arrangements or otherwise collect” the deferred taxes from employees, but provides no further guidance. As a result, employers should consider protective measures (for example, an agreement permitting an employer to deduct any deferred tax that remains unpaid from the final paycheck of an employee whose employment terminates for any reason) to ensure that any deferred FICA taxes are paid by employees whose employment terminates before their deferred FICA taxes have been repaid.