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In Notice 2020-65, the IRS provides initial guidance for implementing the employee Social Security tax deferral outlined in President Trump's August 8, 2020 executive order.

The guidance confirms the following:

• The basis and period of the deferral

Employers are not required to withhold from employees' wages the Social Security tax of 6.2% as provided in the Presidential Memorandum on the executive order (effective for the period September 1, 2020, and through December 31, 2020).

• Employer responsibility for collecting the deferred taxes from employees

Employers will be responsible for ratably collecting the deferred taxes from employees' wages during the period January 1, 2021, to April 30, 2021. Employers will be allowed to make other arrangements, if necessary, to collect the total deferred taxes from employees. Presumably, paying the taxes on behalf of employees (gross up) would be one example of an alternative arrangement.

• Employer's deposit obligation

The deposit obligation for employee Social Security tax does not arise until the tax is withheld. Accordingly, the guidance does not specifically postpone the employers' deposit obligation for deferrals made between September 1, 2020, and December 31, 2020.

However, employers are responsible for collecting the deferred taxes from employees during the period January 1, 2021, and April 30, 2021. Accordingly, the guidance states that interest, penalties, and additions to tax will begin to accrue on May 1, 2021, for any portion of the deferred taxes that is left unpaid.

The guidance does not specifically confirm that employers are also liable for the underlying deferred taxes that are not collected from employees, but this is implied within the framework of IRC Section 3102.

• Computing the deferral

The applicable wages for determining the deferral amount are those wages as defined in IRC Section 3121(a) (Social Security covered wages) or compensation as defined in IRC Section 3231(e)3 (the comparable Railroad retirement tax covered wages) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold if employees are paid on a different frequency (e.g., daily, weekly, monthly).

Wages excluded from Social Security and the comparable Railroad Retirement tax are not counted toward the $4,000 biweekly threshold.

The determination of applicable wages is made on a pay-period-by-pay-period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period, and the relief provided in this notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.

Ernst & Young LLP insights

This initial guidance is lacking in the details necessary for employers to implement the deferral.

Of significant importance, the guidance is silent on whether employer or employee participation is compulsory. As previously reported, when asked about the employee deferral of Social Security under President Trump's executive order, Treasury Secretary Steven Mnuchin told Fox Business News on August 12, 2020, that "you can't force people to participate." The statement was in response to the comment that employers face costs, uncertainties and headaches (implementing the program).

By making employers responsible for recouping the deferred taxes, the matter of Form W-2 reporting must also be addressed in future guidance. Under the current rules, a payment of Social Security tax for a previous year must be reported on Form W-2c. For example, the deferral of Social Security tax in 2020 that is repaid in 2021 would be reported on a 2020 Form W-2c. If the normal Form W-2 reporting rules will apply, an added burden will be placed on employers and reconciliation issues triggering IRS notices are always a risk when Forms W-2c are involved.

Employers that choose to participate in this deferral program should carefully consider the risk they bear for deferrals they are unable to collect later from employees who are terminated, on leave or on a reduced work schedule.

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