When an employee chooses to defer payroll tax pursuant to President Trump’s recent order, who is responsible for making certain that the tax is actually paid at the end of the deferral period? In the ever-changing world of COVID-19-related guidance documents and regulations, the Department of the Treasury recently clarified that employers bear that burden.

Effective September 1, 2020, employees who make less than $4,000 per biweekly pay period may opt to defer payment of their portion of Social Security withholding taxes through the end of 2020.  Those deferred taxes must be paid by April 30, 2021.  The deferral was a result of President Trump’s Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The Memorandum directed the Department of Treasury to act under its emergency authority to issue guidance that would allow employees to elect whether to defer the payment of the employees’ portion of Social Security taxes.

As with almost everything related to the novel coronavirus, the Treasury’s initial guidance left much to be desired. For instance, it did not address whether an employer would have any liability when an employee fails to pay deferred taxes by Aril 30, 2021.  More recent guidance provides some clarification, at least for the time being.

Currently, the Department of Treasury is placing responsibility for the ultimate collection of the deferred employee’s Social Security tax on the employer.  Any Social Security tax deferred must be paid to the IRS by April 30, 2021, for the employer to avoid liability for the tax, penalties, and interest.

Since the burden more clearly rests on employers’ shoulders, must an employer accept that burden?  In other words, must an employer offer the tax deferment option to its employees?  The simple, but somewhat incomplete answer, is no.

Employers are not required to defer withholding and payment of any taxes under President Trump’s Memorandum or the Treasury’s Notice. When considering as an employer whether to elect to offer employees deferment of social security tax, you may wish to undertake the following actions.

• • • Consult with your payroll/human resources department as to the ability and logistics of withholding social security taxes of employees.
    • Evaluate whether any benefit is derived to the employer-employee relationship in having the employee defer taxes now only to have to pay them later.
    • If you elect to allow employees to defer payment of Social Security taxes, provide written notice to employees of the deferral period and the repayment date.
    • Advise employees that they will need to consider cash flow planning for 2020 and 2021 as the deferment will increase take-home pay in 2020, but reduce it in 2021.

Regardless of whether you elect to offer deferral of the employee portion of the Social Security tax, the Coronavirus Aid, Relief and Economic Security Act  allows employers to defer payment of the employer portion of Social Security taxes through the end of 2020.

Given the potentially significant tax consequences of an employee deferring payment of Social Security taxes through the end of 2020, you may wish to consult with your tax advisor, human resources manager and attorney before deciding how to proceed.  The attorneys in our Austin and Dallas offices are available to answer any questions you may have.

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