IRS Issues Guidance Related to FICA Tax Deferral

September 1, 2020

On August 8, 2020, President Trump issued an executive order directing the Treasury Department to provide for the deferral of employee FICA taxes for the period beginning September 1, 2020 and ending December 31, 2020. On August 27, 2020, the IRS published guidance on the implementation of the executive order. Following is a summary of the guidance.

  • Employers are not obligated to allow their employees to defer FICA withholdings and may continue to withhold FICA tax from the wages of all of their employees.

  • This is a payroll tax deferral, not a payroll tax reduction or holiday, although the Trump administration may push for it to become a reduction/holiday in forthcoming stimulus legislation.

  • Employers who elect in to the program may defer FICA withholdings on all employees (subject to income limits discussed below) or allow employees to elect in or out of the deferral program.

  • The deferral only applies to employee FICA tax, the 6.2% tax on an employee’s wages up to $137,700. Medicare tax must still be withheld and deposited. The employer’s share of FICA tax is already eligible for deferral pursuant to the CARES Act.

  • The deferral only applies to taxable FICA wages that are less than $4,000 for the applicable payroll period. If an employee’s gross FICA wages are $4,000 or more for the applicable payroll period, the employee cannot defer any FICA tax for that pay period, but can defer if the employee’s wages for the next applicable period are less than $4,000, as long as the employer agrees.

  • If an employer allows employees to defer and employees elect to do so, the employer must withhold the deferred FICA tax ratably for pay periods between January 1, 2021 and April 30, 2021. For instance, if an employer and employee elect to defer the employee’s FICA tax for the last four months of 2020 and the employee earns $20,000 during that period, the employee will defer, and the employee’s take-home pay will increase by $1,240 during the last four months of 2020. However, the employer will have to withhold both the regular FICA tax and the deferred FICA tax of $1,240 during the first four months of 2021.

The guidance does not address what happens if an employer allows an employee to defer FICA tax for the rest of 2020 and the employee is terminated, quits or otherwise ceases to be employed during the first four months of 2021 before the deferred tax is withheld. Is the employer still obligated to pay the deferred FICA tax? Last week’s IRS release states: “If necessary, the Affected Taxpayer [the employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” This makes it seem that the employer may be held liable for the deferred taxes and will have to develop a policy for collecting them if employees are terminated or leave before April 30, 2021. Consequently, employers who allow their employees to defer their FICA tax may want to implement protective measures to ensure the deferred FICA taxes will be paid if the employee ceases to be employed by the company. For instance, they may execute an agreement providing that if an employee is terminated or voluntary separates before the deferred FICA tax is withheld, the employer can deduct the deferred tax from the employee’s final paycheck. This is an issue that clients should discuss with their attorneys and payroll tax service providers.

It remains to be seen how the deferred FICA tax will be reported, but the IRS will presumably come up with a new draft of Form 941 for the third and fourth quarters of 2020 or the first two quarters of 2021.

Marks Paneth will continue to monitor developments and will provide updates as they become available. Contact your Marks Paneth advisor if you need additional information or assistance or email responseteam@markspaneth.com.

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