The summary of the guidance is as follows:
- The term “Affected Taxpayers” means the employer who is otherwise required to withhold the Social Security tax. This definition is very important later on in the IRS’s guidance.
- The term “Applicable Wages” means wages subject to the Social Security tax, where the wages are $4,000 or less based on a bi-weekly pay period. Wages using a different pay cycle such as weekly or semi-monthly will need to determine if the $4,000 ceiling is met by converting the wage amount as if it were on a bi-weekly cycle. This provision is determined on a pay by pay basis, without regard to the impact of other pay periods. This provision is also all or nothing – if the wage is over $4,000 (based on a bi-weekly cycle) for that pay period then there is no deferral of the Social Security tax (it all must be withheld as normal).
- The term “Applicable Taxes” means the Social Security taxes that are normally withheld from the employee’s wage paid on September 1, 2020, through pay dates ending December 31, 2020. This is the tax that is being deferred.
- The repayment period starts January 1, 2021, and ends on April 30, 2021. The deferred payroll taxes must be repaid within this time. The Affected Taxpayer must withhold or otherwise collect from the employee the Applicable Taxes.
The major problem with the deferral rests on the shoulders of the employer. The business owner is responsible for collecting and remitting the deferred tax. If the employee leaves, the employer is nevertheless shouldered with the burden of chasing down that former employee to collect these taxes. Because withholdings are considered trust funds, the business owner and certain other individuals can be held personally liable for these taxes. Thus, allowing the employee to defer these taxes does not in any way obviate the employer’s responsibility to nevertheless make the IRS whole. Given the reality that people do change jobs, good luck locating former employees and collecting from them.
As the President’s memorandum only changes the due date of the Applicable Taxes, nothing is barring these taxes from being paid beforehand, as in effectively opting out of the deferral and instead withholding from employees as normal.
The risk of not deferring is the unknown of whether a reconciliation at the individual level will be available if this deferral is made permanent. If this is made permanent, will there be a computation on the personal tax return to allow employees credit for the taxes now forgiven? If not, will this open up employee litigation against employers who did not participate in the deferral? Only Congress can enact tax legislation; given what this will do to the Social Security fund, forgiveness is not likely. But it still must be considered in a business owner’s decision whether to allow employees to participate in the Social Security tax deferral.
For questions on this matter please contact Larry Rubin.