Special Tax Alert
Late Friday, the IRS released its much-anticipated guidance (Notice 2020-65) on the implementation of the President’s August 8, 2020 Executive Order (EO) directing the Secretary of the Treasury to take steps to defer the withholding, deposit, and payment of the employee’s share of OASDI taxes and railroad retirement taxes. Our previous discussion of the EO can be found here.
The Notice provides a grace period for the withholding and payment of the employee portion of Social Security taxes on certain wages paid between September 1, 2020 and December 31, 2020. Withholding and payment may be deferred until the period between January 1 and April 30, 2021. To qualify, an employee’s Social Security wages must be less than $4,000 in a biweekly pay period, or the equivalent in a period of different length, determined on a pay period by pay period basis.
If an employer chooses to take advantage of the grace period, then it must withhold and pay the postponed taxes “ratably” from wages and compensation paid between January 1 and April 30, 2021. Accordingly, under the Notice, the postponed amounts may eventually be withheld from the paychecks of the affected employees, as long as they remain employed by the same employer. Postponed taxes will begin to accrue interest and penalties if not paid before May 1, 2021.
However, what measures an employer can take may be subject to state law restrictions, as well as collective bargaining arrangements. Additionally, it should be considered whether these arrangements must be agreed upon before implementing the deferral.
However, Notice 2020-65 does not require employers to change any of their payroll practices; thus, employers are not required to implement the deferral and may continue to withhold Social Security taxes from wages paid during the grace period.