7 More Things to Know About the Payroll Tax Holiday

As I noted in my blog on August 17, President Trump has issued an executive order establishing a payroll tax holiday, which allows companies to defer collecting Social Security tax from their employees for the period from September 1 to December 31 of this year. This applies only to the employee portion of the Social Security tax; companies still have to pay their portion during that period.

I covered five things to know about the payroll tax holiday in my last blog; here are seven more things to know about it.

1. Treasury Has Issued Guidance

Treasury issued two items of guidance on the payroll tax holiday:

• Information Release 2020-195 announces that employers can now begin deferring collection of Social Security tax.
• Notice 2020-65 provides additional implementation guidance on the program.

Both are perhaps the shortest guidance I’ve ever seen from either Treasury or the IRS (IR 2020-195 is only 154 words!). You might read them and think “this is it?” Yep, that’s it. Deb Walker of Cherry Bekaert, who covered this topic during the session “The IRS and Treasury Speak” at this year’s NASPP Conference, does not expect that we’ll get any further guidance.

2. It’s Not Mandatory

IR 2020-195 states that employers are “allowed” to defer collection of Social Security tax from employees. The use of the word “allow” indicates that this is not mandatory; companies can continue to collect Social Security tax if they would like. 

Honestly, the IR is so short and with the emphasis on the implications of the single word “allow,” this feels reminiscent of the poetry courses I took in college. I guess that English Literature degree is helpful after all.

3. Qualification for Deferral Is Pay Period by Pay Period

Companies can defer collecting Social Security tax only for those employees who earn less than $4,000 per bi-weekly pay period (if your pay periods are not bi-weekly, adjust the threshold amount accordingly for the length of your pay period).

Let’s say an employee normally earns less than $4,000 per bi-weekly pay period but has an RSU that vests, causing his wages for one pay period to exceed $4,000. For that one pay period, the company must withhold Social Security tax. This has no effect on the pay periods during which he earns less than $4,000; for those, the company can still defer collecting Social Security tax.

4. Income from ISOs and Qualified ESPPs Doesn’t Count Toward the Threshold

Notice 2020-65 relies on the definition of wages in Section 3121(a) for purposes of determining what compensation counts for purposes of the $4,000 threshold. Income attributable to exercises of ISOs and Section 423 ESPPs and dispositions of stock acquired pursuant to said exercises is specifically excluded from wages under Section 3121(a). 

Income from other forms of stock compensation, such as NQSO exercises and payouts of RSUs, counts toward the $4,000 threshold.

5. All Deferred Amounts Must Be Collected by April 30, 2021

This is a tax deferral, not an exemption. Thus, all Social Security taxes that employees would have been required to pay but didn’t because of the order must be collected once the deferral period ends. Companies should collect the deferred amounts ratably from employee wages from January 1 through April 30 of next year.

On May 1, 2021, interest and penalties will begin to accrue on any remaining outstanding amounts.

6. Deferred Amounts Must Be Collected from Former Employees, Too

If an employee for whom Social Security has been deferred terminates before the company has fully collected the deferred tax, the company is still obligated to collect the unpaid amounts. Notice 2020-65 provides that the company does not have to collect the amounts from the former employee’s wages but does not offer any suggestions of how the amounts might be collected. Good luck with that.

7. There’s a Hotline

If you have additional questions, the IRS has set up a Notice 2020-65 hotline. The phone number is (202) 317-5436. If anyone calls the hotline and is willing to share your experience (hold times, how helpful are they), I’m all ears (off the record is fine, I’m just genuinely curious).

More to Come

The NASPP Conference session “Election Year 2020: Big 4 Views from Inside the Loop” will be covering this topic when they present their session on September 10. I can’t wait to hear what the four audit firms have to say about it.