IRS Notice 2020-65 Provides Limited Guidance on Presidential Memorandum Permitting Payroll Tax DeferralSeptember 1, 2020
A Presidential Memorandum issued on August 8, 2020, grants employers the option to defer withholding, depositing and paying the employee portion of Social Security taxes on wages paid during the period from September 1, 2020, through December 31, 2020. Deferral applies only to employees earning less than $4,000 of wages during any bi-weekly pay period (which amounts to $104,000 per year), or an equivalent amount with respect to other pay periods. On Friday, August 28, 2020, the IRS issued Notice 2020-65, providing additional guidance on this program. Taxes deferred pursuant to this program must be repaid by April 30, 2021.
The CARES Act already permits employers to defer the employer portion of Social Security taxes. For more information on the deferral of the employer portion of Social Security and payroll taxes under the CARES Act, see our prior alert that can be found here.
Only Employee Contributions to Social Security are Deferred Through the Memorandum
In addition to a 1.45% Medicare tax on all wages, employees are required to pay a 6.2% Social Security tax on wages up to the Old Age, Survivors, and Disability Insurance (OASDI) limit ($137,700 for 2020) (the “Employee Portion”). These taxes are withheld by the employer from the employee’s wages.
The Memorandum allows deferral of the 6.2% Employee Portion of Social Security tax from September 1, 2020 through December 31, 2020. No penalties, interest, or additions to tax will be imposed if the taxes are paid by April 30, 2021. The maximum amount that can be deferred under the program is $2,232.
The Memorandum and Notice 2020-65 do not address deferral of self-employment taxes. Thus, no deferral appears to be available for independent contractors, partners in partnerships, or other persons who are self-employed.
Determining Employee Eligibility
All employees whose wages are generally less than $4,000 per bi-weekly pay period, or the equivalent threshold amount for other pay periods, are eligible for the deferral. Wages are defined as wages for Social Security tax purposes. Commissions, bonuses, and overtime hours are all considered wages. Whether an employee has wages that qualify for deferral is determined separately in each pay period, and the determination is made irrespective of the amount of wages paid in other pay periods. Therefore, employees who receive year-end bonuses may not be eligible for deferral for the pay period in which a bonus is received. There is no guidance for determining whether employees with more than one job earning combined wages in excess of $4,000 per bi-weekly pay period are eligible for deferral.
The Deferral Is Effectively a Loan, Not a Permanent Cut
In general, repayment is accomplished by withholding additional amounts from wages paid to the employee during the period from January 1, 2021, to April 30, 2021. In general, if the taxes are deferred, take-home pay of eligible employees will increase by 6.2% for four months in 2020, but their take-home pay will decrease by 6.2% during the period from January 1, 2021 to April 30, 2021 as the deferred taxes are withheld and paid.
It is unclear who would be responsible for paying the deferred taxes if an employee leaves his or her job prior to April 30, 2021. Notice 2020-65 suggests that employers may make other arrangements to collect the deferred taxes from employees if necessary. One possibility may be withholding the entire amount of deferred taxes from the employee’s final paycheck. If the employer cannot withhold or collect them from the employee, the IRS can pursue either the employer or employee for the unpaid taxes. In addition, corporate officers who willfully fail to withhold and pay such taxes may incur personal liability for such taxes.
Other Considerations for Employers
Employers should also consider a number of other issues before deciding whether to take advantage of the deferral program. Buyers and sellers in asset purchase transactions closing prior to year-end should consider how this deferred tax liability should be addressed. Another consideration includes whether any subsequent Congressional COVID-19 relief legislation will affect deferral. In addition, employers should consider the impact of the deferred taxes on payroll tax credits available under the CARES Act, the Families First Coronavirus Response Act, and other provisions of the Internal Revenue Code. Employers who wish to take advantage of the deferral will need to update their payroll systems quickly.