IRS Addresses the President’s Executive Order on Employee Payroll Tax Deferral in Notice 2020-65

On August 28, 2020, the IRS issued Notice 2020-65 that provides some needed guidance for employers wondering whether and how to comply with the employee payroll tax deferral described in the August 8, 2020 Presidential memorandum (often referred to as an “executive order.”). Even though the Notice leaves many questions unanswered, it addresses some key items.
 

Background 

In an August 8, 2020 memorandum to the Secretary of the Treasury entitled, “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” President Trump directed Treasury Secretary Mnuchin to use his authority to defer the withholding, deposit and payment of employee Social Security tax on wages (i.e., 6.2% of employee wages) or Railroad Retirement tax on compensation paid to certain employees during the period September 1 through December 31, 2020. The memorandum instructed the Treasury Department to issue guidance explaining how to implement the deferral and to explore avenues, including legislation, to eliminate the obligation to pay the deferred taxes. Secretary Mnuchin made comments in an August 10 interview that employers would not be required to offer the deferral.

 

IRS Guidance

The two-and-a-half-page IRS guidance leaves unanswered many concerns surrounding the employee payroll tax deferral, but it does clarify several important points as they pertain to an employer’s payroll process.  Below is a summary of the guidance.

  • The employee payroll tax deferral applies to wages and compensation paid on a pay date during the period beginning on September 1, 2020 and ending on December 31, 2020.
  • The employee payroll tax deferral applies only if wages or compensation paid to an employee for a biweekly pay period are less than $4,000, or the equivalent amount with respect to other pay period frequencies. This threshold is determined on a pay period-by-period basis.

 

  • The due date for the deferred withholding and payment of the employee Social Security tax and Railroad Retirement tax is postponed until the period beginning on January 1, 2021 and ending on April 30, 2021.
  • Employers are responsible for the deferred taxes and must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021 or interest, penalties and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid deferred taxes. If the employee’s wages are not sufficient for the withholdings, the employer can pursue payment from the employee.

 

Employer Dilemma

Many questions remain in terms of how the employee payroll tax deferral will impact employees and employers, how the deferred payroll taxes are to be reported and what changes must be made to an employer’s payroll system. Until the IRS provides further guidance regarding these outstanding questions and concerns, employers that consider implementing the employee payroll tax deferral should exercise care by putting safeguards in place to ensure that they do not fall victim to the IRS penalties.

Since the employee payroll tax deferral takes effect as early as September 1, 2020, employers that consider implementing the tax deferral likely will face a dilemma due to some of the unanswered questions unless the IRS issues additional guidance soon. For example:

  • Can a participating employer apply the same deferral policy to all employees, or must the employees be allowed to choose?
  • What are the consequences if an employee unexpectedly leaves the employer before paying the deferred tax?
  • If the employer cannot collect the taxes from former employees, is the employer liable for the tax or failure to withhold penalties?
  • What if the employee does not earn enough wages during the period between January and April of 2021 due to disability, leave of absence, etc., to pay for the deferred tax?
  • Does the employer report the deferred payroll tax as tax withheld on the employer’s quarterly tax returns (i.e., Form 941) and Forms W-2?
  • What happens if the employer did not defer the payroll tax, but the government later decides to forgive the deferred taxes? Will the employer or the employees be able to recover the tax that would have been forgiven had the tax been deferred?
  • Will the IRS provide a mechanism (e.g., revising the employer’s Form 941) to allow employers to “recover” the tax that was already withheld and remitted, but was eligible for the deferral, without causing issues with the employer tax filings and incurring penalties?
  • What if an employee receives a supplemental wage payment (e.g., bonus) outside of a normal pay period, how will that be treated for the purpose of the $4,000 eligibility threshold?

 

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