On August 8, 2020, President Trump issued an executive order to defer the withholding, deposit, and payment of the tax employees pay towards Social Security starting September 1 through December 31, 2020. The order affects employees whose biweekly pay is below $4,000 on a pretax basis.
On August 28, 2020, the Treasury and IRS issued Notice 2020-65 which provided further guidance to employers on how to implement this payroll tax deferral. Prior to adopting the executive order, employers should consult with their tax advisor and/or legal counsel regarding the risk they bear.
Although the executive order provides an opportunity for employees to experience an increase in their take-home pay by deferring their social security taxes through the end of the year, it is critical for employees to also understand they will notice a reduction in their take-home pay from January 1 through April 30, 2021 while employers revert to withholding their standard FICA taxes and withhold the deferred taxes from 2020.
Employers must also consider how to handle recouping the deferral when an employee leaves employment prior to the end of the deferral repayment period. If the employer cannot or does not withhold this amount from the employee’s paycheck beginning on January 1, 2021, the employer is still responsible to pay the applicable taxes on behalf of the employee. In addition, the Notice states that interest and penalties will accrue on any unpaid taxes beginning on May 1, 2021.
If an employer wishes to adopt the executive order, it is strongly recommended to consider adopting a written internal policy, signed by the employee, prior to implementing the deferral. This policy would explain how the tax deferral will affect their current and future paychecks and allow the employer to potentially collect the deferred social security tax from the employee.
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