Should Employers Stop Withholding Employees’ Share of Social Security Tax in September? (Part 2)
Social Security Tax

The title’s question is triggered by a Presidential Memorandum issued on August 8, 2020 (the “Memo”) directing the Secretary of the Treasury to defer Social Security taxes for certain employees. Mid-afternoon on August 28, 2020 the quick answer to the question was "No." https://workingtogether.pullcomblog.com/archives/should-employers-stop-withholding-employees-share-of-social-security-tax-in-september/
A few hours later Notice 2020-65 was issued to provide guidance on the implementation of the intent of the Memo.  Does Notice 2020-65 change the answer to the question?  In the author’s opinion, the answer is a qualified "No."

In Notice 2020-65, the Secretary of the Treasury uses his authority under Internal Revenue Code Section 7508A to postpone certain tax liability deadlines to defer the withholding, deposit and payment of employee Social Security tax related to compensation earned by certain employees between September 1, 2020 and December 31, 2020 (the “Postponement Period”).  The authority granted by Section 7508A does not compel taxpayers to take advantage of delayed deadlines.  Accordingly, each employer needs to determine if delayed withholding makes sense for the employer and its workforce.

The temporary relief from withholding applies to employees who are generally paid less than $4,000 during any bi-weekly pay period.  Notice 2020-65 clarifies that the determination of whether an employee is eligible for the deferred withholding is made on a pay period by pay period basis. Any deferred taxes must be withheld ratably over the period of January 1, 2021 through April 30, 2021 and paid by April 30, 2021 to avoid penalties and interest.  This could provide some relief to employees who are struggling now but could create a significant hardship in 2021 if the employees then have up to twice as much Social Security tax withheld from their paycheck in early 2021.

Notice 2020-65 names the employer as the Affected Taxpayer rather than the employee from whom the Social Security taxes will be withheld.  This means that the employer is ultimately responsible for the payment of the employee share of Social Security taxes for wages or compensation earned during the Postponement Period.  There is a high probability that employers who choose to defer withholding of employee Social Security taxes during the Postponement Period will end up paying some of those taxes in respect of former employees or current employees who cannot afford the “double” withholding in early 2021.

Since the postponement of withholding employee Social Security taxes and subsequent mandatory withholding of the amount postponed impacts net pay, the implementation of a postponement of withholding is arguably the subject of collective bargaining. Maintaining the status quo (i.e. continuing regular withholding of the employees’ share of Social Security taxes for the remainder of 2020) avoids the bargaining issue.  Employers may have to choose between appeasing employees who do not want the postponement of withholding and employees who do want the withholding postponed.

The reason for the qualified No above is that some employers may want to implement the postponement for only a portion of the permitted Postponement Period.  This gives employees a bit of a break in 2020, reduces the amount of exposure an employer has to pick up the tab for employees no longer on the payroll in 2021, and allows the withholding for a “short period of time” to be spread over a four-month period.

If you have any questions please reach out to any of our Labor, Employment Law, and Employee Benefits attorneys at Pullman & Comley.

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