On August 28, 2020, the IRS in Notice 2020-65 responded to a Presidential Memorandum (executive order) by giving employers the option¹ to delay their withholding of the 6.2% employee share of Social Security and the comparable Railroad Retirement tax for certain employees from September 1, 2020, to December 31, 2020.

Our executive summary of the employee Social Security deferral is available here.

Survey results

We performed an informal anonymous survey of employers to determine the level of their participation in this deferral program. Of the 420 total responses, close to 50% stated they will continue to withhold the Social Security tax from employees' wages and close to 50% indicated they are waiting on more IRS guidance before deciding. A slim margin, just 2%, are planning on making the deferral available to employees, but not by the September 1 effective date. None of the responders said they implemented the program by the September 1 effective date.

The survey results are available for download in the attached PDF file.

Background

As we reported in our previous alert (EY Tax Alert 2020-2163), the IRS provided the following details in Notice 2020-65 concerning this deferral program:

• Only employees earning less than $4,000 in a biweekly period are eligible for the deferral for that payroll period.
• Applicable wages are those subject to Social Security or the comparable Tier 1 Railroad Retirement tax, without taking into account wages and compensation excluded from the Social Security tax.
• Applicable wages are determined on a pay-period-by-pay-period basis irrespective of the wages or compensation paid to the employee for other periods.
• Employers are required to collect the Social Security tax deferral from employees ratably over the period January 1, 2021, through April 30, 2021.
• Employers can make other arrangements for the recovery of the tax deferral (for example, pay the tax on behalf of employees and gross up for the added taxes due on the employer's payment).
• Interest and penalties will not apply to employee Social Security taxes the employer does not deposit according to the terms of the IRS guidance; however, employers face interest and penalties starting May 1, 2021, for employee deferrals that remain unpaid.
• Separately, in the draft Form 941 published on August 28, 2020, employers are instructed to report the employee Social Security tax deferral on lines 13(b) and 24 of the third and fourth quarter Forms 941.
• Notice 2020-65 applies only to the employee share of federal Social Security tax and comparable Railroad Retirement tax and not to any state or local payroll tax withholding obligations.

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ENDNOTES

¹Although IRS Notice 2020-65 does not expressly state that the deferral is optional for either the employer or the

employee, within the authority of IRC Section 7508A the deferral could not be mandated. IRC Section 7508A provides that "the Secretary may specify a period of up to 1 year that MAY [emphasis added] be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed."

Accordingly, Treasury has no authority to require that affected taxpayers postpone the withholding of Social Security tax pursuant to Notice 2020-65.

In this case, Notice 2020-65 designates employers as affected taxpayers, thereby permitting employers to disregard their deadline; employees are not designated as affected taxpayers and, as a result, do not have permission to disregard the deadline on their own.

Further, to the extent that Notice 2020-65 is ambiguous concerning the employer's ability to opt out, an information release accompanying the notice states: "The Department of Treasury and Internal Revenue Service today issued guidance implementing the Presidential Memorandum issued on August 8, 2020, ALLOWING [emphasis added] employers to defer withholding and payment of the employee's portion of the Social Security tax if the employee's wages are below a certain amount."

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ATTACHMENTS

EY Payroll News Flash

EY Payroll News Flash