By Attorney Katherine A.B. Beenken
On Friday, August 28, the Internal Revenue Service Released Notice 2020-65, describing a new rule that allows employers -- including public employers -- to temporarily halt withholding and payment of the employee's portion of certain Social Security payroll taxes. This rule has been interpreted as "voluntary" for employers. Employers considering changes to their payroll are strongly encouraged to contact legal counsel to discuss the implications of the new rule under both state and federal law.
The two and one-half page IRS guidance document explains that this temporary change to payroll practices applies to applicable wages earned between September 1, 2020 and December 31, 2020. The Notice permits employers to defer payment of the Social Security tax from employees whose wages and compensation are less than $4,000 per biweekly pay period. However, employers who elect to make this change must then withhold and pay the total tax that was deferred from wages the employee subsequently earns between January 1, 2021 and April 30, 2021 unless a Congressional action subsequently forgives repayment of the deferred amount. The IRS requirement for employers to collect and pay the deferred amount in early 2021 has led some employers to question how the new rule would operate in practice, especially if employment terminates prior to May 1.
The Notice is directed at employers as the Affected Taxpayer, meaning that the directives, implementation decisions, and ultimate responsibility to collect the deferred tax fall to the employer, not individual employees. The Notice does not expressly state whether participation is a voluntary option for employers; however, to-date the IRS has not released any guidance or notice of a penalty for employers who choose to maintain the status quo. Absent an enforcement provision from the Service, many employers are treating the rule as an optional policy decision.
For employers who do elect to suspend Social Security payroll tax withholding for eligible employees, the Notice empowers employers to "make arrangements" with employees to collect the applicable taxes. Any tax not collected by May 1, 2021 may be subject to penalties, interest, and "additions to tax." The Notice indicates that the employer would be responsible for this repayment in the event that an employee, including a former employee, fails to make the necessary repayments during the first four months of 2021. Employers need to be prepared that in the event that an eligible employee's employment terminates, it may not be possible to recover from the employee's wages all the tax that is due and the employer would then be responsible for payment of the deferred tax.
Employers might also consider how the deferral will interact with Iowa Code Chapter 91A - Wage Payment Collection, and other state laws. The Notice does not comment on whether an employer could allow only certain employees to defer payment, or if employers can condition participation on an employee's agreement to repay the deferred amount. Employers who wish to implement this payroll change may want to coordinate with payroll processing vendors and develop a notice to affected employees that clarifies the employer's policy on these topics.
The information in this Client Alert is accurate as of September 1, 2020. Notice 2020-65 contains nuances that are beyond the scope of this Client Alert, and it is possible that subsequent IRS guidance will be published at a later date. Employers interested in more information on this topic are invited to contact a member of the Ahlers & Cooney Employee Benefits Practice Group to discuss their situation in greater detail.