On August 28, 2020 the IRS issued Notice 2020-65, providing much-anticipated guidance implementing an August 8 Presidential Memorandum directing the Treasury to use its authority to defer the withholding, deposit and payment of certain payroll tax obligations. This notice postpones the date by which employers must withhold and submit the 6.2 percent employee portion of Social Security tax for employees earning less than $4,000 per biweekly pay period. Under the guidance, payroll taxes that would otherwise be withheld from September 1, 2020 through December 31, 2020 can be postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. However, remaining questions regarding implementation and concerns that the deferred payroll taxes will need to be repaid in 2021, rather than be forgiven, will likely deter employers from participating.
About Notice 2020-65
Under Notice 2020-65, employers can defer the withholding, deposit and payment of certain payroll taxes on wages paid from September 1 through December 31, 2020. The deferral applies to the 6.2 percent employee portion of Social Security tax, as under the CARES Act employers can already elect to defer the deposit and payment of the employer portion of Social Security taxes. The taxes deferred would not be forgiven, and instead would be due in 2021. Based on the language of the notice, deferral of the payroll taxes appears to be voluntary rather than mandatory, and therefore employers will need to decide whether to opt in.
The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods, which translates to an annual salary of $104,000. The determination of applicable wages is made on a pay-period-by-pay-period basis. In other words, if the amount of compensation payable to an employee for a particular pay period is less than the threshold amount ($4,000 for biweekly pay periods), then the payroll tax deferral applies to that compensation, irrespective of the amount paid to that employee in other pay periods. Therefore, an employee with variable pay (e.g., commissions, overtime or a bonus) could be eligible for deferral in one payroll period, but not eligible in the next payroll period, resulting in additional complexity.
The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between January 1, 2021, and April 30, 2021. Interest, penalties and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says that, if it is necessary, employers can “make arrangements to otherwise collect the total applicable taxes from the employee” but does not provide details on that requirement. Presumably employers that implement the deferral will need to plan when employees with deferred taxes terminate employment before the taxes are collected, such as collecting the deferred taxes from a final paycheck or by separate check from the employee.
Remaining Questions and Concerns
Some of the questions and concerns remaining include:
- Can employees opt out of the program? It is unclear whether an employee, who does not wish to repay the amount they would owe next year, will be required to participate if the employer does so.
- What will happen if an employee is furloughed, laid off or resigns prior to 2021 or the end of April 2021? Employers are concerned that the obligation to make the payments will remain with them and that they could be subject to potential penalties.
- If an employer stops withholding taxes for an employee, could they be stuck with the bill if that employee leaves the company before 2021 and the company is not be able to deduct the taxes from future paychecks?
- Will burdening employees with larger tax withholdings next year be viewed unfavorably, generating disgruntlement when they receive smaller paychecks starting in January?
In light of the complexity and remaining questions surrounding implementing a payroll tax deferral, potential employer liability and a concern that the option in its current form will only achieve a short-term deferral of payroll tax obligations, we recommend avoiding implementation until further guidance is issued. We will continue to monitor developments with payroll tax deferral and will quickly communicate any significant new guidance that will impact our clients.
For further questions or guidance regarding this option, please contact your BT advisor by calling 770.396.2200.