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Are Employers Required to Follow the Executive Memorandum in Deferring Employee Social Security Taxes?

Many employers have already been taking advantage of the ability to defer the employer’s portion of social security payments that were due on or after March 27, 2020, and before January 1, 2021, that was provided under the CARES Act. Half of the deferred employer social security tax is due on December 31, 2021, and the remaining balance on December 31, 2022.

However, a Presidential Memorandum issued August 8th directed the Secretary of the Treasury to use his authority pursuant to §7508A of the Internal Revenue Code to defer the withholding, deposit, and payment of the employee's share of Social Security tax for employees generally earning less than $4,000 in gross wages during any bi-weekly pay period. Taxes eligible for deferral are employee Social Security tax on wages paid from September 1, 2020, to December 31, 2020. The Presidential Memorandum was intended to allow employers to defer the amount of social security tax that would have been withheld from an employee, 6.2%, and have the amount remain in an employee’s net paycheck until a later date. The intention of this deferral was to act as another stimulus check to US individuals.

Many businesses did not take immediate action based on the Presidential Memorandum, as they were awaiting guidance from the Internal Revenue Service. The IRS issued Notice 2020-65 on August 28, 2020, which determined that employers that are required to withhold and pay the employee share of social security tax are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum. These affected employers due date for the withholding and payment of employee’s social security is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021. In addition, the Notice requires that the affected employers must pay the deferred taxes ratably from wages and compensation paid between January 1, 2021, and April 30, 2021, or interest and penalties will apply. The employer may make arrangements to otherwise collect the deferred social security taxes from the employee.

Due to the fact that the employers are liable to make the deferred employee social security payments in 2021, and are not guaranteed that their employees will still remain with the company during that 2021 time period to ensure collection, many employers started questioning whether the deferral of employee social security taxes was optional or required. Specifically, the IRS notice does not expressly state that the deferral of employee social security tax is optional.

However, based on IRC §7508A that is cited in the IRS Notice, it does not appear that the IRS has the authority to mandate the deferral. In addition, the information release paired with the Notice stated:

The Department of Treasury and Internal Revenue Service today issued guidance (PDF) implementing the Presidential Memorandum issued on August 8, 2020, allowing employers to defer withholding and payment of the employee's portion of the Social Security tax if the employee's wages are below a certain amount.

Based on the current guidance, it would appear that employers are not required to stop withholding the portion of employee social security taxes. In addition, while the Presidential Memorandum directed the Secretary of Treasury to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes, no such legislation exists today. Based on recent reports out of Washington, leaders have expressed doubts about whether Congress will be able to provide any additional pandemic relief packages, citing partisanship as the fall elections near.

Employers must explore their options surrounding employee social security withholding including:

  1. Employers stop withholding the employee portion Social Security and legislation is later passed that would forgive the amount.
  2. Employer does not stop with withholding the employee portion Social Security and legislation is later passed that would forgive the amount.
  3. Employers stop withholding the employee portion Social Security and legislation and legislation is NOT passed that would forgive the amount.
  4. Employer does not stop with withholding the employee portion Social Security and legislation and legislation is NOT passed that would forgive the amount.

Employers cannot continue to withhold the employee Social Security and not deposit.

We strongly encourage employers to explore their options regarding the deferral of employee social security withholding with their advisors and clearly communicate their findings with their employees.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute an accountant-client relationship.