Small Business Taxes & ManagementTM--Copyright 2020, A/N Group, Inc.
In early August the President issued a Presidential Memorandum directing the Secretary of the Treasury to use his authority under Section 7508A to defer the withholding, deposit, and payment of certain payroll obligations. Employers can defer the withholding of the employee portion of his or her contribution to the old-age, survivors and disability insurance (OASDI) tax or the Railroad Retirement Act Tier 1 tax. The deferral applies to wages paid from September 1, 2020 through December 31, 2020. The amounts deferred must be withheld during the first four months of 2021 and deposited at that time. The deferral only applies only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000 or the equivalent amount if payroll is made based on other pay periods. The
The IRS has issued Notice 2020-65, providing limited guidance to employers to implement the Memorandum. There are still a number of questions to be answered. And keep in mind that this is a deferral, not a grant. You should also be aware that the deferral applies only to the OASDI (Social Security) portion and not the Medicare portion of the witholdings. The total withholdings (for both portions) for an employee are 7.65 percent of his or her salary (up to the annual limit, currently $137,700. The employee's portion of the OASDI is 6.2 percent (the remaining 1.45 percent is for Medicare and is unaffected by the Memorandum).
The Memorandum also directs the Secretary of the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of the Memorandum. That forgiveness appears to be a long shot at this time.
An example may make this easier to understand.
Example 1--Fred works for Madison Inc. and normally makes $1,000 a week. That's equivalent to $2,000 on a bi-weekly period. Madison agrees to defer withholding of Fred's portion of OASDI--$62 on his $1,000 salary. Madison withholds and deposits the Medicare portion, $14.50. Madison also pays its portion of OASDI and Medicare, $76.50. Fred's wife also works for Madison and makes $2,050 weekly ($4,100 bi-weekly). Her share of OASDI withholdings cannot be deferred.
Example 2--The facts are the same as in Example 1, but during the first two weeks in October most of Fred's department is out sick and Fred works 30 hours of overtime. For those two weeks he makes $2,300 per week. During those pay periods none of his OASDI can be deferred because his earnings exceed the limit.
As the second example shows, the $4,000 bi-weekly test is based on the pay period, not the employee's annual earnings. That adds a complication if you do your payroll manually.
The theory is that the deferred amount is made up by withholdings made ratably during the first four months of 2021. If the deposits are made timely there will be no penalties or interest. Penalties and interest will begin to accrue on May 1, 2021 with respect to any unpaid taxes. Notice 2020-65 advises that affected taxpayers (employer) may make arrangements to otherwise collect the applicable taxes from the employee.
The last line applies to situations where the employer cannot withhold from the employee. For example, if the employee is no longer employed at some time before April withholdings for the deferred amount have been completed in 2021. There are no additional details on how to rectify this situation. But it appears that the employer will be responsible for the deferred OASDI, whether withheld or not.
Deferral of OASDI is not mandatory. An employer can elect to do so. The employee must also elect to defer. While it's remotely possible the deferred amount will be forgiven, it's not something you should plan on.
What's it worth? For an employee making $52,000 a year the deferred amount per week would be $62. Assuming the amount is deferred for 15 weeks, that amounts to an interest-free loan of $930 for about 4 months. For lower paid employees the benefits are less; for higher paid obviously more. But that might not outweigh the cost of administering the program. And it could get much more expensive if an employee leaves before the amount is repaid. While a deferral may look attractive to an employee currently strapped for cash, it's unlikely that situation will completely reverse in January.
If an employer offers the deferral option, the company should get a signed statement from the employee opting for the deferral and retain that in the company file. Your payroll company may have drafted a sample agreement.
A final note. The definition of wages (for the $4,000 bi-weekly payroll test) is based on Secs. 3121 and 3231 of the Code. If you have employees close to the $4,000 threshold you should discuss the definition with your tax advisor.
Copyright 2020 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 09/01/20