Bruce Claassen

August 31, 2020

On Friday, the IRS issued much-anticipated guidance (Notice 2020-65) on the payroll tax deferral ordered by President Trump via presidential memorandum on August 8, 2020.  While the Notice provides additional details as to how to determine which wages are subject to the deferral and when the deferred taxes must be repaid, it leaves many questions unanswered and creates potential liability for employers.

 

What questions the IRS Notice answers:

The Notice allows employers to defer withholding the employee’s portion of Social Security tax on affected employees’ compensation from September 1st, 2020, through the end of the year. 

 

Deferral of the employee’s portion of Social Security tax is only allowed if the expected wages of the employee are less than $4,000 per bi-weekly period.  Pro-rated, this means the thresholds for other pay periods would be as follows:

• Weekly - $2,000

• Semi-monthly - $4,333

• Monthly - $8,667

 

Note that this threshold is to be determined each pay period.  So, over-time and bonuses could cause employees to exceed this threshold one pay period, but not the next.

 

The company must collect and remit the taxes deferred from now through year-end ratably from employee wages paid during the period January 1, 2021 until April 30, 2021.   All deferred withholding tax is required to be paid to the government by April 30, 2021, or penalties and interest will apply.

 

Issues still unresolved, or newly raised by the IRS Notice:

The Presidential order moves the due date for collecting and remitting employee social security tax withholding but does not mandate deferral.  Treasury Secretary Mnuchin has confirmed that the deferral is voluntary, and employers may continue to withhold and deposit employee Social Security tax per their normal schedule. 

 

However, the Notice does not address whether employers must honor requests by employees to have their Social Security taxes deferred in accordance with the Notice.  It is important to note that the Notice does not release employers from liability for the deferred Social Security taxes if they are unable to collect the deferred Social Security taxes from employees. For example, if an employee is no longer employed in January 2021, it appears that the employer will need to repay the deferred Social Security taxes from its own funds. While the employer may make “other arrangements” to collect the deferred Social Security taxes from terminated employees, this will not be a practical solution in most cases. Employers will also need to have a system in place to track the deferred social security tax. 

 

The President has indicated that he will ask for the deferral to be forgiven.  This outcome depends not only on the Presidential election but the makeup of Congress as well.  Questions have also been raised regarding risk of legal action by employees if employers do not defer withholding, and the President is able to make good on his promise (loss of “free” money to the employee). 

 

It can’t be overstated that employers should carefully consider whether to implement this payroll tax deferral.  We are happy to discuss the pros and cons with you, and also encourage you to contact your legal counsel before implementation.  We hope the IRS issues more guidance soon, but since many employers are already working on payrolls this week that could fall under the guidance of this Notice, it seems that everyone will need to work with the information we have for the time being.