On August 28, 2020, the Department of Treasury and Internal Revenue Service issued Notice 2020-65 implementing the Presidential Memorandum issued on August 8, 2020, allowing employers to defer withholding and payment of the employee’s portion of the Social Security tax for the period September 1, 2020, thru December 31, 2020, if the employee’s wages are less than $4,000 during a bi-weekly pay period.
The Notice provides that:
- Employers that are required to withhold and pay the employee share of social security tax (or the railroad retirement tax equivalent) are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum and this notice and are considered “Affected Taxpayers.”
- For Affected Taxpayers, the due date for the withholding and payment of the employee share of the social security tax (6.2% of wages) and so much of the railroad retirement tax equivalent on Applicable Wages, imposed by section 3201(a), (collectively “Applicable Taxes”), is postponed until the period beginning on January 1, 2021 and ending on April 30, 2021.
- For purposes of this notice, “Applicable Wages” means wages as defined in section 3121(a) or compensation as defined in section 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020 and ending on December 31, 2020; but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.
- The determination of Applicable Wages is made on a pay-period-by-pay-period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period; and the relief provided in this notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
- An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice “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 Applicable Taxes. If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.
This is the extent of the guidance issued by the Department of Treasury and Internal Revenue Service regarding the implementation of the President’s payroll tax deferral. Please note that, despite the language in Notice 2020-65 and the Presidential Memorandum, employers are not required to defer withholding the 6.2% employee share of the social security (or railroad retirement tax equivalent) for employees making less than $4,000 per bi-weekly pay period or an equivalent threshold amount with respect to other pay periods. The Notice delays the employer’s due date for paying these taxes, it does not mandate that employers adopt the deferral. In addition, Treasury Secretary Mnuchin stated that the deferral would be “optional for employers” in an interview last month.
Furthermore, this is only a deferral of the employee payroll tax; it is not a tax cut or elimination of the tax liability. Employers are responsible to collect the deferred payroll taxes from their employees on a ratable basis starting January 1, 2021. Employers are responsible for paying the deferred taxes by April 30, 2021 or they will be subject to interest and penalties on any unpaid amounts. Employers are permitted to make other arrangements with their employees to collect the deferred payroll tax amounts. This could be a challenge for many employers, as they are responsible for remitting the deferred portion of the employee payroll tax in 2021 and could experience difficulties withholding additional amounts from employee pay to recoup the deferral if the employee leaves their job, is making less money, or is laid off or terminated.
The President has indicated that, if he is re-elected in November, he will make the four-month deferral a permanent payroll tax cut, meaning the liability to pay the deferred taxes would be eliminated. However, the President would still need Congressional approval to eliminate four months of the payroll tax, which could be complicated depending on the results of the Presidential and Congressional elections on November 3, 2020.
If an employer elects to give their employees the option of deferring payroll taxes for the remainder of 2020, the employer should contact their payroll service provider (if applicable) to determine what actions need to taken to defer withholding taxes for specific employees in their payroll system. Employers should document their employees’ decisions regarding deferring the payroll tax in a timely manner. Employers should also consider entering into written financial agreements with employees who elect to defer the tax regarding repayment terms, whether the employees are required to pay the deferred amount ratably over the first four months of 2021 or provide alternative payments in the event the employee is separated from the employer before deferred amounts can be repaid in full. Otherwise, the employer will be on the hook for repaying the employee share of the payroll tax for those employees who are no longer employed.
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For additional information on Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com
