By: Peter Beach
August 31, 2020
On August 8, 2020, the Trump Administration issued an Executive Memorandum on the deferral of employee payroll tax obligations. On August 28, 2020, the Treasury Department issued Notice 2020-65 providing employers with information on some aspects of the deferral program. Here are the highlights.
Only Specified Payroll Taxes May Be Deferred
Employers may defer the withholding, deposit and payment of the 6.2% payroll tax on employee wages and the equivalent amount under the Railroad Retirement Tax Act (RRTA). This is a deferral of tax, not a forgiveness. It applies to taxes on wages paid with respect to the period beginning September 1, 2020, and ending on December 31, 2020.
It Appears that Employers Can Choose Whether to Implement the Deferral
The Notice does not state expressly whether employers must implement the payroll tax deferral. However, the Notice relies on Section 7508A of the Internal Revenue Code. Under that section, the IRS can postpone various deadlines, but cannot prohibit the withholding and payment of taxes. Consistent with that limited scope, the Notice describes the guidance as “allowing” deferral and being “available” to employers.
The Notice applies to employers, not to employees. Therefore, it appears that the IRS did not intend to grant employees the right to choose whether to defer withholding, deposit and payment. That said, the Notice does not expressly prohibit or allow an employer inclined to implement the deferral from allowing individual employees to choose whether or not to have the employee share of their payroll tax deferred.
Timing of Payment of Deferred Taxes
Under the Notice, employers are required to withhold and pay any deferred payroll taxes ratably from January 1, 2021, through April 30, 2021. The Notice also states that if necessary, employers can arrange to otherwise collect the deferred taxes. However, if any deferred payroll taxes are not repaid by April 30, interest, penalties, and additions to tax will begin to accrue on May 1.
A question that many employers have already raised is what to do if they implement the program and an employee does not remain employed with them through April 30, 2021. One possible approach might be, in accordance with the Notice’s statement about “arrangements to otherwise collect,” to require employees to agree to collection of the taxes from a final paycheck or by separate check from the employee.
Eligibility for Deferral
Only wages of certain employees will qualify for the deferral. Under the Notice, deferral is available with respect to employees who have wages and compensation of less than $4,000 in a given biweekly payroll period during the September 1 to December 31 deferral period (or an equivalent amount for other payroll periods). Wages means wages subject to FICA taxes (those reported in Box 3 of Form W-2). Note that defining eligibility with respect to an amount earned within a particular period means that employees with variable pay arrangements, such as commissions, overtime, or bonuses could be eligible for deferral in one payroll period and not in another.
Some Practical Suggestions
The nature of the original Memorandum, the “careful” wording of Notice 2020-65 and the political “energy” surrounding the situation have created circumstances under which it is difficult to provide legal advice with respect to many questions regarding the payroll tax deferral program. Employers who plan on implementing the program may want to consider taking some or all of the following precautions, among others appropriate to their particular circumstances:
- To ensure that your deferral plan is feasible, confer ahead of time with your internal payroll team and/or outside payroll provider regarding the mechanics and advance timing needed for adjusting paychecks to reflect the deferrals in 2020 (including for employees who are eligible in some payroll periods and not in others) and for adjusting paychecks to repay the deferred amounts in 2021.
- Prepare a written agreement in which participating employees acknowledge that subject to subsequent changes in the law (i) it is expected that they will have to “pay back” all deferred Social Security taxes ratably between January 1 and April 30, 2021, and (ii) they agree:
- to withholding of Social Security taxes during the period from January 1 through April 30, 2021, of not only their regular 2021 withholding, but also the amount of Social Security taxes deferred in 2020;
- to reimburse the employer for any deferred payroll taxes should they leave the company before all deferred payroll taxes have been repaid; and
- to a plan for repayment of deferred payroll taxes should the employee be earning less in 2021 than in 2020.