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Article | Executive Pay Memo North America

Is the temporary Social Security tax holiday mandatory?

Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Steve Seelig and Gary Chase | September 4, 2020

IRS guidance leaves out key detail — whether employers must impose this tax holiday and distribute withheld Social Security taxes to employees.

On August 28, the IRS issued Notice 2020-65, which provides guidance for employers on how to implement President Trump’s Presidential Memorandum, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The memorandum provides a Social Security tax holiday from September 1 to December 31, 2020, for employees whose wages or compensation for any biweekly pay period generally is less than $4,000, calculated on a pre-tax basis.

The notice clarifies that employers will measure whether the $4,000 threshold is met on a “pay period-by-pay period basis.” The notice also clarifies that wages for this calculation do not include any amounts excluded from wages or compensation such as 401(k) deferrals, or other before-tax employee benefit items. Otherwise, the notice states simply that employers must withhold and pay the taxes deferred until December 31 between January 1, 2021, and April 30, 2021, to avoid interest, penalties and additions to tax. The notice then provides that, if necessary, the employer may make arrangements to otherwise collect the total taxes due from the employee.

While we are not tax advisors, we understand that companies will be reluctant to provide this tax holiday to employees who would then need to have the foregone Social Security taxes withheld from other wages or compensation during the first four months of 2021. There is nothing in the notice that permits an employer from delaying the repayment beyond May 1, 2021, without incurring interest, penalties or other additions to taxes, so if an employer wanted to extend the repayment for employees beyond that date to help ease their financial burden, the company would still need to pay the taxes and essentially loan those amounts to employees over an extended repayment period.

It is too early to know whether companies will simply ignore the application of the tax holiday, as has been suggested in public comments from various business groups. The notice seems to indicate via a footnote that companies may not simply keep withheld taxes in escrow until the start of 2021 while awaiting additional guidance as to whether this holiday may be made permanent, because once taxes are withheld, the company must meet its deposit obligation.

Authors

Senior Director, Executive Compensation (Arlington)

Director, Retirement and Executive Compensation

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