On August 28th, the IRS released guidance on the President’s Executive Memorandum regarding the deferral of employees’ social security payroll taxes. The deferral applies to employees whose pretax compensation during any biweekly pay period is less than $4,000 for the period of September 1, 2020 through December 31, 2020.

Are employers required to defer employees’ taxes?

In oral comments the Treasury Secretary stated that the deferral will be optional for employers.  The guidance does not explicitly mandate that employers comply with the Executive Memoranda.

How do employers subsequently withhold and pay deferred taxes?

The guidance states that the taxes should be withheld and paid over the period of January 1, 2021 through April 30, 2021. Please note employers will need a way to track employee deferrals between time of deferment and December 31, 2020 as the deferral does not release the employer of the liability to pay the taxes.

If an employee defers their taxes and their employment is subsequently terminated, will the employer be liable for the taxes?

Employers will be liable for employees’ unpaid deferred taxes and, on May 1, 2021, any unpaid taxes will begin to accrue penalties and interest. The guidance allows employers to “make arrangements to otherwise collect the total Applicable Taxes from the employee.” Employers may be able to withhold the entire balance of deferred taxes from a terminated employees’ final wages.  Please consult your legal counsel regarding employment and wage laws.

What documentation is required by employers?

Although the guidance does not address required documentation, we recommend employers obtain written confirmation from employees opting to defer their taxes and the terms of subsequent payment.  Employers should communicate to employees the requirements to repay deferred taxes to ensure employees understand that future paychecks will be reduced for deferred taxes.