IRS issues guidance clarifying President Trump’s payroll tax deferral

The Internal Revenue Service (“IRS”) issued Notice 2020-65 on August 28, 2020, providing additional guidance for the administration of the payroll tax deferral announced in President Trump’s August 8, 2020, Presidential Memorandum (the “Deferral Memo”) instructing the Treasury Department (the “Treasury”) to defer the withholding, deposit and payment of certain payroll tax obligations.

Deferral Memo

The Deferral Memo provides that the employee portion of Social Security taxes on certain wages are deferred (i.e., wages paid to employees earning less than $4,000 on a bi-weekly basis between September 1, 2020, and December 31, 2020, are eligible for deferral). However, the Deferral Memo did not provide details regarding what wages are eligible for deferral, when the deferred Social Security taxes must be paid or whether the employer or employee is responsible for remitting the deferred Social Security taxes. Notice 2020-65 attempts to address these issues.

Notice 2020-65

First, neither the Deferral Memo nor Notice 2020-65 requires that an employer defer the employee portion of Social Security taxes; thus, whether to participate in the Social Security tax deferral program appears to be at the employer’s discretion. Second, the Deferral Memo and Notice 2020-65 clarify that the payment of the employee portion of any Social Security tax is only deferred (not forgiven). Employers should weigh a number of factors, including, but not limited to, the administrative burden and employee expectations when deciding whether to participate in the Social Security tax deferral program.

Responsibility to remit

Notice 2020-65 places the responsibility for remitting the deferred Social Security taxes on employers. Employers choosing to defer the employee portion of Social Security taxes must withhold and remit the deferred Social Security taxes ratably from wages paid between January 1, 2021, and April 30, 2021, or interest, penalties and additions to tax will begin to accrue on employers starting May 1, 2021. In practice, this will likely mean double withholding between January 1, 2021, and April 30, 2021.

Therefore, while employees will have higher “take-home” paychecks between September 1, 2020, and December 31, 2020, employees will have lower “take-home” paychecks between January 1, 2021, and April 30, 2021. When participating in the deferral of Social Securities taxes, employers are cautioned to note the impact to the affected employees to avoid confusion or incorrect assumptions in 2021.

While Notice 2020-65 provides some clarification on the administration of the Social Security tax deferral, it leaves a number of questions unanswered, including: (i) how to administer the program with respect to employees no longer employed after December 31, 2020 (e.g., termination or leave of absence); (ii) how to administer the program with respect to employees making less in 2021 (e.g., a withholding obligation between January 1, 2021, and April 30, 2021, in excess of wages); and (iii) whether employees earning below the applicable threshold can opt out of the tax deferral if the employer elects to participate. With respect to some of the administrative issues, Notice 2020-65 simply states that employers “may make arrangements to otherwise collect the total” Social Security tax deferral from employees.

Wage threshold

Notice 2020-65 clarifies that “wages” for purposes of the Social Security tax deferral includes all wages (as defined in Section 3121(a) of the Internal Revenue Code) or compensation  (as defined in Section 3231(e) of the Internal Revenue Code) paid to employees between September 1, 2020, and December 31, 2020, to the extent the wages, paid for a bi-weekly pay period, are less than the $4,000 threshold. Notice 2020-65 also clarifies that the wage threshold is computed on a pay period-by-pay period basis. Accordingly, whether an employee is eligible for Social Security tax deferral can fluctuate depending upon individual circumstances (e.g., an employee may take unpaid vacation and, thus, bring the employee below the $4,000 bi-weekly threshold when it was previously above the $4,000 bi-weekly threshold).

Other factors

Employers should also consider a number of provisions of the Internal Revenue Code (e.g., Section 3102 and Section 6672) before implementing any deferral program. Both of these provisions may impose penalties on employers (and/or certain individuals) for failure to withhold the employee portion of Social Security taxes.

Ed Buchholz is a member of Thompson Coburn’s Tax group.