Payroll Tax Alert: Employee Social Security Tax Deferral

On Saturday, August 8, the President issued an Executive Order (EO) directing the Treasury to defer the withholding, deposit, and payment of the employee-share of Social Security tax (6.2%) otherwise due on wages paid to certain employees from 9/1/20 – 12/31/20. At this time there are significant unanswered questions regarding this payroll deferral and additional guidance is expected. We therefore advise employers to wait for additional guidance from the Treasury before implementing any changes as a result of the EO.

In the meantime, our initial analysis of the EO is as follows:

• The EO allows for the deferral, but not elimination, of the employer’s obligation to withhold and remit the employee-portion of Social Security taxes (6.2%) on wages paid to qualified employees from 9/1/20 – 12/31/20. The EO does not alter the employer’s obligation to pay the employer-share of Social Security taxes on these wages.

• Employees eligible for the tax deferral in the EO are any employee whose wages, on a pre-tax basis, “generally is less than” $104,000 on an annualized basis. Additional clarification is needed from Treasury with respect to this income limitation.

• Although the EO only allows for tax deferral, the EO directs the Secretary of the Treasury to “explore avenues, including legislation” to eliminate the employee’s obligation to pay the taxes deferred under this program. Eliminating the employee’s obligation to pay any tax deferred under this program would require legislation approved by Congress.

• Under the Internal Revenue Code, an employer is liable for any failure to withhold employee payroll taxes, which would appear to include Social Security taxes deferred under the EO. To that end, in the event an employee does not repay the IRS for the Social Security tax deferred, there is a possibility that the IRS could attempt to pursue the employer for a failure to withhold the taxes owed from the employee’s future wages.

• The EO does not appear to make this tax deferral mandatory for employers. However, the EO suggests that employees could be given the option to elect the tax deferral; additional guidance is needed on this point.

• The EO does not address the employer-portion of Social Security taxes. Under the previously-enacted CARES Act, qualifying employers may still delay the remittance of the employer-share of Social Security taxes, as described more fully in our previous alert.

The EO specifies that the Treasury “shall issue guidance to implement” the EO. Additional guidance is needed in order for employers to make well informed decisions regarding the Social Security Tax deferral scheduled to be available as of this September 1st.  Drummond Woodsum will continue to monitor developments in this area and issue client alerts as additional guidance is released. In the meantime, we are available to answer any additional questions you have.