On Aug. 28, the U.S. Department of the Treasury and the IRS issued Notice 2020-65 to implement an Aug. 8 executive memorandum directing Treasury to use its authority under IRC Section 7508A to “defer the withholding, deposit, and payment of” the 6.2% employee portion of Social Security tax on certain wages paid between Sept. 1, 2020, and Dec. 31, 2020.
The memorandum directs Treasury to make available the deferral to any employee with less than $4,000 of applicable pretax wages payable during any biweekly period (or the equivalent amount for other pay periods) and to permit the deferral without any penalties, interest, additional amount, or addition to tax. The notice provides a bit more detail on the wages eligible for the tax deferral, and it postpones withholding (and related deposit penalties if no withholding occurs) of the eligible tax during the deferral period. While the notice does not mandate the deferral, it requires implementing employers to withhold and deposit the deferred amounts between Jan. 1, 2021, and April 30, 2021. However, the notice leaves unanswered significant questions on which guidance is needed.
The wages to which the tax deferral can apply are limited to “applicable wages.” Generally, these are wages paid between Sept. 1, 2020, and Dec. 31, 2020, that otherwise are subject to withholding of the employee’s share of 6.2% Social Security tax, but only if the employee’s wages for a pay period do not exceed a threshold ($4,000 for a biweekly pay period or an equivalent for other pay periods). Although the notice provides that a threshold amount equivalent to $4,000 paid biweekly applies in the case of other pay periods, it does not specify how that amount is to be computed. The notice provides that applicable wages are determined separately for each pay period, meaning that an employee’s wages in one pay period may be eligible for deferral of the employee’s share of Social Security tax even if that employee’s wages in other pay periods are not applicable wages.