POSTPONEMENT OF WITHHOLDING & REMITTANCE OF EMPLOYEE PAYROLL TAXES
Following a recent Presidential Memorandum, the Internal Revenue Service (IRS) has released guidance regarding the postponement of withholding and remittance of an employee’s share of Social Security taxes.
The Memorandum allows the US Treasury to make available a postponement of withholding, deposit and payment of the employee’s share of Social Security tax (6.2%) on wages paid from September 1, 2020 to December 31, 2020 that are less than $4,000 on a biweekly pay period or equivalent amount in other pay periods. The threshold is determined on a pay period by pay period basis.
The postponement of the withholding and remittance of the employee’s share of Social Security tax is optional for the employer. Employers may seek input from their employees, but this is not required. Whether employers permit employees to opt in or opt out of the postponement is at the discretion of the employer and not addressed in the recent guidance.
Based on IRS guidance, withholding and remittance of an employee’s share of Social Security tax ratably may be postponed to between January 1, 2021 and April 30, 2021. Penalties, interest, and additions to tax will begin to accrue on May 1, 2021 for any unpaid taxes. If necessary, employers may make arrangements to collect the total applicable taxes from an employee.
Notably, the guidance, does not address some obvious concerns, including the following:
- How does an employer collect taxes from a terminated employee?
- Can increased take-home pay be used for 401(K) loan repayments, garnishments, child support payments, etc.?
- How will postponed amounts be reported on the 2020 Form W-2?
An IRS spokesperson has explained that Form 941 will be revised for the third quarter of 2020 to report postponed taxes for employers who elect the postponement.
The IRS permits employers who have elected postponement to withhold an employee’s share, beginning January 1, 2021. However, such withholding may have unforeseen and detrimental consequences for employees and possibly employers.
If an employer chooses to elect the postponement, we recommend a notice be provided to employees that clearly states that an employee’s share of Social Security is postponed until December 31, 2020, and withholding for these amounts will occur ratably between January 1, 2021, and April 30, 2021 – in addition to employment tax withholding otherwise required on wages for January through April 2021.
The IRS has stated that regardless if the amounts are recovered from an employee, for example in the case of a separation, the employer will remain liable for the employee’s share – and must remit the postponed withholding by April 30, 2021.
With so many questions remaining, we advise employers to proceed with extreme caution at this time when opting for the postponement.
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