Treasury Issues Payroll Tax Deferral Guidance

August 28, 2020 | Kristine A. Tidgren

On August 28, 2020, IRS issued Notice 2020-65, 2.5 pages of guidance related to the President’s August 8 payroll tax deferral Memorandum (Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster). Based upon the risk this new program would impose upon employer and employee alike, it appears likely that many employers will not participate in this program. The guidance appears to leave that choice with the employer.

The Rules

The guidance defines “affected taxpayers” as employers required to withhold and pay the employee share (6.2 percent of wages) of social security tax under IRC § 3102(a) or the railroad retirement tax equivalent under IRC § 3202(a). The guidance states that under the President’s Memorandum, the due date for withholding and paying payroll taxes on “applicable wages” is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021.

Note: The guidance points out in a footnote that because the employer’s deposit obligation is triggered by the withholding obligation, the duty to deposit is likewise deferred.

“Applicable wages” are defined as social security or railroad retirement wages paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020. These wages are only “applicable wages” eligible for deferral, however, if:

  • the amount of the wages or compensation paid for a bi-weekly pay period is less than $4,000, or
  • the amount of wages or compensation paid for a different period does not exceed the equivalent of $4,000 for a two-week period.

The guidance states that the “applicable wages” determination is made on a payroll period-by-payroll period basis. In other words, an employee’s wages might qualify for payroll tax deferral in one payroll period, but not another.

The Kicker

The guidance states that the employer must withhold and pay all taxes previously deferred for an employee by ratably withholding them from wages and compensation paid to that employee between January 1, 2021, and April 30, 2021. On May 1, 2021, interest and penalties will begin to accrue. If necessary (presumably, for example, if the employee is no longer working for the employer), the employer “may make arrangements to otherwise collect the total taxes” from the employee.

What Does This Mean?

Under this guidance, the employer and the employee will remain on the hook for the deferred payroll taxes until they are deposited (or until Congress perhaps acts to forgive them). Unless Congress takes such action, any employees with payroll taxes deferred would be subject to roughly double withholding from January through April of next year. Employers who are no longer paying those employees would apparently be left to “make arrangements” to otherwise collect the total taxes from those employees.

The guidance provides no opt-in or opt-out instructions for either employers or employees. It appears that employees have no say in the matter and that an employer can choose whether or not to defer for the eligible employees. It is difficult to imagine many employees wanting the risk of a double tax hit next year or many employers wanting to risk liability for unpaid taxes. These risks, coupled with the burden of reprogramming payroll software to accommodate it, will likely mean that many will choose not to participate in the new payroll tax deferral program. On the other hand, some may worry that if they don't defer, employees will miss out on a tax benefit down the road if Congress chooses to forgive deferred amounts.

Note: The guidance does not provide any relief to self-employed taxpayers in terms of allowing them to defer the other half of SECA taxes not already deferrable under the CARES Act.