Caution regarding bare bones guidance on payroll tax ‘holiday’

Sep 10, 2020
Written by Rose Gundersen, VP of Operations & Retail Services

Some employees are allowed to defer paying their Social Security tax for eligible wages paid between September 1 to December 31 of 2020. This tax ‘holiday’ is made available by the Presidential Memorandum issued on August 8, 2020.

Many employers are not certain of issues related to administering and repaying the deferred tax based on the bare bones 3-page IRS guidance.

With so many unanswered questions, an article from the Society of Human Resources and Management may provide some guidance and/or cautions.

  • Tax ‘holiday’ is voluntary by default because there is no penalty for non-compliance.
  • Eligibility for deferral is limited to employees earning less than $4,000 for a biweekly pay period or less than $104,000 per year for salaried workers.
  • Employees with pre-tax deductions for a cafeteria plan may still be eligible if such deductions reduce the biweekly earnings to less than $4,000.
  • A draft version of a revised Form 941 was released by the IRS for employers to report deferred employee share of the Social Security tax on line 13b.
  • Repayment presents concerns for both employers and employees.
  • For employees, the ‘holiday’ is really a deferral to be repaid between January 1 to April 30, 2021 or interest and penalties will accrue starting May 1, 2021.
  • For employers, there are a few concerns but there may be more.
  • The IRS provides no guidance when an employee quits, leaving no ability for employers to recapture the deferred tax amount.
  • It is not clear, however, whether the IRS will hold the employer or employee liable for interest and penalties accrued due to a delay in payment by April 30, 2021.
  • Washington State law under RCW 49.52.060 requires employers to obtain a written agreement in advance with employees deductions that are for employees’ benefit or required by state or federal law. In this case, the Social Security tax deferral is probably considered a federal law albeit voluntary.
  • To ensure the legitimacy of this written agreement, employers need to educate employees and their obligation to repay the deferred tax. To date, there are no education materials available from the IRS.

For now, the best news is the “voluntary” by default nature of this tax ‘holiday.’