The Internal Revenue Service (IRS) issued guidance implementing the President's executive order 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. The guidance makes relief available for employers and generally applies to wages paid starting Sept. 1, 2020, through Dec. 31, 2020. The employee Social Security tax deferral may apply to payments of taxable wages to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately. No deferral is available for any payment to an employee of taxable wages of $4,000 or above for a bi-weekly pay period.
The Administration does not have authority to cut payroll taxes unilaterally, however, it arguably does have authority to delay the date by which they must be remitted. Congress would have to pass a law if the payroll tax is eventually cut, and there is little support for payroll tax cuts on either side of the aisle right now. Thus, whatever course of action employers take, they should recognize that the odds of this resulting in anything other than a simple delay (rather than a cut) appear at the moment to be small.
- Many businesses have recognized that the relief doesn't apply to the first $4,000 in wages, but rather to wage payments of $4,000 or less in a bi-weekly period. This creates a very large cliff for the first dollar an employee earns over $4,000 (someone earning $4,000 pretax would not have the tax withheld, but someone earning $4,001 would have $248 withheld).
- The program appears especially difficult for employees who work fluctuating hours (i.e., making more than $4,000 one pay period, but less than $4,000 another pay period), as they may have the tax withheld for some pay periods but not others. Updating payroll systems to accommodate these nuances is likely exceedingly difficult.
- If employees do not have the tax withheld, employers will need to remit the tax beginning next year. This can be particularly difficult in high-turnover industries, where an employee may no longer be with the company next year and thus the employer would be on the hook for any taxes owed.
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