IRS Issues Guidance on Payroll Tax Deferral Program and Advises Payroll Industry That Deferral Is Voluntary

On August 28, 2020, the IRS issued Notice 2020-65 (“Notice”) to provide guidance concerning the Executive Order that President Trump issued on August 8, 2020 (“Executive Order”). Per the Notice, the Secretary of the Treasury has accepted the President’s directive to permit a temporary deferral of the withholding and payment of the employee share of Social Security taxes on certain wages. On September 3, an IRS attorney announced in a monthly payroll industry teleconference that employers are not required to utilize the relief, answering a question lingering after the Notice was issued.

As detailed in the Executive Order, this deferral can apply to wages paid to an employee during the period between September 1, 2020 and December 31, 2020, but only when the employee’s earnings are less than $4,000 per bi-weekly payroll period. The Notice clarifies that whether an employee’s wages are covered must be determined per pay period. In other words, an employee whose wages fluctuate may be eligible for deferral of Social Security taxes in one pay period, and then be subject to withholding for these taxes in the next pay period.

In addition, the Notice affirms that the obligation to remit these payroll taxes is postponed, not forgiven. Employers that defer withholding and payment of these Social Security taxes in September – December 2020 must collect and remit these funds to the IRS “ratably from wages and compensation paid between January 1, 2021 and April 30, 2021” in order to avoid incurring penalties and interest charges. As such, unless these payroll taxes are forgiven by a subsequent act of Congress, covered employees whose taxes are deferred in 2020 will incur a double-charge for Social Security taxes for the pay periods spanning January 1, 2021 through April 30, 2021.

Furthermore, employers remain liable for the payment of all deferred taxes even if they are unable to collect such funds from employees. Such a circumstance may arise when an employee terminates employment prior to January 2021, is on an extended unpaid leave of absence, or otherwise does not have sufficient wages from which to deduct the previously deferred taxes. The Notice states that employers “may make arrangements to otherwise collect” these taxes from employees. The scope of this directive, including how it interacts with state laws governing allowable deductions from employee wages, remains undefined.

Although neither the Executive Order nor the Notice makes clear whether employers are required to participate, the IRS advised after the Notice was issued that participation in this deferral program is voluntary. Accordingly, and particularly given the difficulties in implementing the relief and employer liability for uncollected Social Security taxes, employers may wish to forgo participation and continue collecting payroll taxes pursuant to their normal practices.  Employers should consider communicating to their employees whether the employer will participate, or not, in the deferral program.

Neal Gerber Eisenberg will be closely monitoring and reporting any developments related to the implementation of this Executive Order. If you have any questions regarding the recent guidance or other labor and employment issues, please contact Corey Biller or your Neal Gerber Eisenberg attorney.