Temporary Deferral of Employee Social Security Tax Withholding: Is It Really Worth It?

Written by Jeffrey Davine

The Executive Order.

On August 8, 2020, in response to the negative effects of the COVID-19 pandemic on America’s economy, President Trump issued an executive order permitting employers to defer the withholding and remittance of the employee’s share of the 6.2% Social Security (FICA) tax that is required when wages or salary are paid during the period September 1, 2020 through December 31, 2020. 

It’s important to note that the executive order authorizes the deferral (but not the forgiveness) of the employee’s share of the tax.  Forgiveness would require legislation by Congress.  As a result, the deferred taxes must be repaid beginning on January 1, 2021 and must be fully repaid not later than April 30, 2021.  Interest and penalties may be assessed if the deferred taxes aren’t repaid timely. In addition, employers must continue to remit their share of the Social Security tax. 

The IRS Response.

In response to the executive order, on August 28, 2020, the IRS issued Notice 2020-65.  The Notice does not say that participation in the deferral program is mandatory.  Rather, the Notice appears to allow employers to decide whether they want to opt in or decline to participate. 

The Notice (and the executive order) provide that only employees earning less than $4,000 during a bi-weekly pay period (or an equivalent amount if a different pay period is used) are eligible for the deferral.  This means, for example, that if someone earns the equivalent of $5,000 during a bi-weekly pay period, he/she wouldn’t be eligible for the deferral during that pay period. 

What’s the Benefit?

The issue is whether the ability to defer the employee’s share of Social Security taxes for four months has any real benefit and whether administrative burdens of the deferral program outweigh any benefit.

On the one hand, deferring the Social Security taxes will provide some additional funds for eligible employees between now and the end of the year.  For example, for an employee who is paid $50,000 per year in bi-weekly installments, he or she will receive approximately $119 more during each pay period through the end of 2020.  On the other hand, because the taxes must be repaid, it will require employers to withhold DOUBLE the amount of Social Security taxes from employee compensation during the first four months of 2021. 

There are several issues that an employer may want to consider before choosing to participate in the deferral program.  One issue is the accounting and administrative burdens associated with having to keep track of the amount of tax deferred for each employee during the period September through December and the amounts withheld and repaid beginning in 2021.  Another issue for employers is how to recoup the deferred taxes from employees who are terminated or furloughed before the deferred taxes are withheld and repaid.  If all of the deferred taxes are not withheld and deposited with the government by April 30, 2021, the employer will be required to repay the deferred taxes plus penalties and interest.  Notice 2020-65 states that, if necessary, the employer may make alternative arrangements to collect the taxes from the employee.  Presumably, this means that for an employee who is terminated or furloughed, the unpaid taxes can be withheld from the employee’s final check. 

The net effect of the deferral is to provide employees with an interest-free loan of the deferred taxes.  But how much benefit will this short term loan really provide?  Moreover, the loan must be repaid by employees during the period of when he or she may have other significant expenses to pay, such as bills from holiday spending, property taxes, and income taxes.

To provide some context, for an employee who earns $4,000 in each bi-weekly pay period in September through December, approximately $2,200 of Social Security taxes would be deferred.  This same amount, of course, will need to be repaid beginning in 2021 and the employee’s paycheck would be reduced accordingly.  Unless the employee makes arrangements to retain a sufficient amount in reserve to repay the taxes (which, presumably, defeats the purpose of the deferral), the employee could suffer a significant hardship. 

Let’s Think About This.

Overall, deferral of the Social Security tax appears to be a plan that is not well thought out and is likely to provide very little benefit to employees.  Unless Congress enacts legislation to forgive the deferred tax, employers (and employees) would be well advised to think very carefully before opting in. 

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