At the end of August, the U.S. Department of Treasury and U.S. Internal Revenue Service (IRS) issued guidance regarding a Presidential memorandum allowing deferral of the 6.2% employee Social Security tax. Issued on August 8, the guidance unfortunately did not supply enough details to determine whether an employer could be or will be held liable if employees fail to pay the deferred tax.
The IRS posted Notice 2020-65 on its website, noting the notice postpones the deadline for employers to withhold and pay the employee’s portion of Social Security taxes. This generally applies to biweekly wages and compensation of less than $4,000 paid between Sept. 1, 2020 through Dec. 31, 2020. What is not in question is that employers will be liable for the payment of any employee taxes that are deferred.
Notice 2020-65 says employers must withhold and pay any deferred taxes between Jan. 1, 2021 and April 30, 2021. An employer may enter into agreements with an employee regarding the payment of the deferred tax. This could be applicable in cases where the employee is no longer employed with the employer. Because of the nature of short-term and contract work conducted by Staffing agencies, this leaves Staffing employers particularly vulnerable because of the transitory aspect of temporary work.
To avoid potential liability, many employers are choosing to continue withholding and paying the tax, rather than deferring it. Only if Congress decides to forgive the deferred tax, something that is highly doubtful in the current environment, would it be considered prudent for employers to defer the tax.
Additionally, it does not seem that deferral of tax is mandatory, and Treasury Secretary Mnuchin publicly stated the IRS cannot force deferral. The August 2020 notice further supports this because it moves the due date for withholding and payment of the tax but does not prevent withholding and payment in advance of those dates. A news release from the IRS said the notice “allows,” not requiring employers to defer. Use of the word “may” as in “deferral may apply” offers more strength to speculation that deferral of the tax is not mandatory.
To be safe, it is always a good idea to consult with a trusted tax advisor regarding application of the Presidential memorandum as you weigh the pros and cons of deferral.