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Treasury Provides Guidance on Employee Social Security Tax Deferral

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On August 8, 2020, President Trump issued an executive action directing the Secretary of the Treasury to use the Secretary’s authority under Section 7508A of the Internal Revenue Code of 1986, as amended (the “Code”), which permits the Secretary to delay the deadline for certain actions required under the Code, to permit the deferral of the withholding, deposit, and payment of the employee portion of social security tax (6.2% of wages up to $137,700) on wages and compensation paid between September 1, 2020 and December 31, 2020 to employees earning below a certain threshold amount.

On August 28, 2020, the Treasury released Notice 2020-65 in response to President Trump’s August 8 executive action. Pursuant to Notice 2020-65, employers may, but are not required to, defer the withholding and payment of the employee portion of the social security tax on wages and compensation paid between the period beginning on September 1, 2020 and ending on December 31, 2020 for employees earning less than $4,000 in wages or compensation on a bi-weekly basis (or the equivalent amount with respect to other pay periods).

Determining Eligible Employees

For purposes of calculating employee wages and compensation per pay period to determine if an employee is below the threshold amount and therefore eligible for the social security tax deferral, wages[1] and compensation[2] include the value of benefits paid during the applicable period as well as nonrecurring items, such as commissions, overtime, and equity awards. The determination is made on a period by period basis and, as such, an employee may qualify for the deferral in some periods and not in others.

Payment of Deferred Amounts

This is not an exemption but is only a short-term deferral. Any social security taxes deferred pursuant to Notice 2020-65 must be withheld from the applicable employee’s wages and remitted to the Internal Revenue Service by the employer on a ratable basis between January 1, 2021 and April 30, 2021. It is the employer’s responsibility to withhold and remit the deferred taxes. This may result in double the social security tax withholding for the January 1, 2021 and to April 30, 2021 period. If necessary, such as in the case of a furloughed or terminated employee, the employer may make alternative arrangements to collect the deferred amount from the former employee.

What’s Next?

The general reception to the social security tax deferral has been negative. In addition to the administrative burden, employers are concerned about the risk of having the ultimate responsibility for the deferred taxes. However, the deferral may be beneficial to some employers willing to assume the risk and administrative burden as a means to provide their employees with larger paychecks for the remainder of 2020, at a time when many families are struggling with the financial impact of COVID-19.

We are continuing to monitor these developments and can assist businesses in navigating these regulations.

[1] For purposes of Notice 2020-65, the term “wages” has the definition prescribed in Section 3121(a) of the Code.

[2] For purposes of Notice 2020-65, the term “compensation” has the definition prescribed in Section 3231(e) of the Code.

This advisory was prepared by Melissa Sampson McMorrow and Michael Mooney in Nutter’s Tax Department. If you would like additional information, please contact Melissa, Michael, or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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