Employee Social Security Tax Deferral

Not enough information to act on and unacceptable risk to the employer

A lot of questions are coming in from employers and employees regarding the Presidential Memorandum calling for an employee social security payroll tax holiday starting September 1. Two big problems exist with this decree that keep it from being actionable at this time.

First, Congress and Treasury have failed to issue sufficient guidance regarding exactly how all the rules and reporting would work. This leaves employers and the payroll systems they rely on with far too little time and information to make the necessary programming changes and at risk of penalties and interest if they do it incorrectly. Pete Isberg, VP of government relations for ADP affirmed this on FOX Business saying, “It’s unlikely that many employers will be able to make the programming changes by September 1. We’ve advised Congress and Treasury that anything like this normally requires six months for an orderly programming transition.” Payroll systems are not ready because the rules and exact reporting requirements have not yet been spelled out by Treasury, and only after clear guidance from Treasury is in place can payroll system changes be implemented.

Second, and extremely important, the minimal guidance that was handed down last week (see IRS notice 2020-65 [PDF]) makes it clear that the employer is the “Affected Taxpayer” and retains responsibility (read: liability) for paying the deferred employee taxes in the first quarter of 2021. There is no protection given to the employer if the employee is no longer working for the employer or if the employee is unable to withhold the deferred amount from their paycheck. While the employee is supposed to have the deferred taxes taken out of their paycheck in Q1 of 2021, there is no mechanism to guarantee this, and thus it is the employer who is on the hook for it. We strongly encourage employers to get clarification on how they will be relieved of the obligation to make the deposit of deferred taxes if the employee is not available or able to pay them when required. Until then, employers are wise to avoid this new liability for employee social security taxes by declining the payroll tax holiday at this time.