On August 8, 2020, an executive order that broadly allows for the suspension of certain payroll taxes, such as the allowance to employers to stop withholding Social Security tax from employee paychecks through the end of the year, was signed and took effect September 1, 2020.
The Secretary of the Treasury on August 28, 2020, released Notice 2020-65 that provided insight into how the employee Social Security tax deferral works.
We break down what the executive order is, what Notice 2020-65 says, and address the implications of the payroll deferment.
Everything you need to know about this payroll holiday
What is the Executive Order?
The executive order signed on August 8, 2020 and went into effect September 1, 2020, allows employees to defer payments on the Social Security tax from their paychecks, beginning September 1, 2020 until December 31, 2020.
Is withholding the tax mandatory?
The withholding of the social security tax is only mandatory if your employee meets the requirements and requests the withholding.
Who is eligible for this deferral?
Employees whose pay before taxes is less than $4,000 biweekly, less than $2,000 weekly, and $104,000 annually, can opt into the Social Security tax deferral. To calculate this for people paid monthly take the annual threshold and apply to your pay frequency.
Who owes the deferred money?
If an employee requests withholding the Social Security tax, the employee owes that deferred money to their employer between January 1, 2021 to April 30, 2021.
The Social Security tax is 6.2% of an employee’s wage per pay period. Thus they owe 6.2% of each paycheck received between when their deferral begins until December 31st, 2020.
Who is responsible for remitting postponed taxes?
The employer is responsible for paying the total applicable taxes between January 1, 2021 and April 30, 2021. If the total applicable taxes are not paid in this period, interest, penalties, and additions to tax will begin to accrue on May 1, 2021.
Starting January 1, 2021, employers must withhold the employee portion of Social Security as normal. In addition, the employer needs to withhold the amount of deferred Social Security tax.
If necessary, the employer may make arrangements to otherwise collect the total applicable taxes from the employee. Notice 2020-65 does not define what is “necessary” nor does it provide any more information as to what “arrangements” the affected taxpayer may make. Presumably, the “if necessary” rule covers a situation where the affected taxpayer deferred paying over affected taxes of an employee and then the employee leaves the affected taxpayer’s employment any time before April 30, 2021.
In that case, an employer could withhold the accumulated taxes from the final paycheck. Or the former employee could pay the deferred taxes to their former employer by check. The IRS will clarify that surely.
How we can support your business
We know this time is challenging. From the CARES ACT, to the PPP loans, to this, federal aid is here to support your small business, but there are important questions that need answering. Legislation, federal aid, loans, solutions are being written and implemented in real time as a response to real time events.
Let us at Considine and Considine know how we can best support your business with this tax holiday and during this time. Schedule a consultation with us today.