31 Aug Payroll Tax Deferral Guidance
Friday afternoon, the Treasury released Notice 2020-65 which provides an initial set of guidance regarding President Trump’s payroll tax deferral memorandum from earlier this month. Unfortunately, the guidance is not all encompassing and leaves many questions to be answered.
This guidance/memorandum provides the ability to defer the payment of the employee share of social security tax (6.2%) starting September 1, 2020.
The guidance for the payroll tax deferral leaves much to be desired, and we hope that additional guidance will come out soon to help employers make an educated decision on how to proceed. We will continue to monitor for additional guidance and interpretations.
Payment of Deferred Taxes
The current guidance states that an employer must withhold and pay any of the employee (EE) social security taxes deferred during the period of September 1, 2020 through December 31, 2020 ratably from wages paid between January 1, 2021 and April 30, 2021 or otherwise face interest and penalties. Although not expressly stated in the Notice, it appears that the employer is ultimately the responsible party for repaying deferred taxes. Meaning, if an employee is no longer employed during the period of January 1, 2021 to April 30, 2021, or wages are insufficient to cover the catch-up withholding, it appears that the employer must still deposit the deferred taxes. The Notice does not address the aforementioned scenarios, and instead just states that “if necessary, the [employer] may make arrangements to otherwise collect the total [deferred taxes] from the employees.”
Also of note, the guidance only postpones the time to withhold the EE social security tax. The obligation of the employer to deposit the EE social security tax does not arise until after the tax is withheld. So, since the Notice does not separately postpone the time to deposit the taxes, an employer that withholds EE social security tax appears obligated to remit the taxes and cannot hold the taxes (i.e. in escrow) until future guidance is released.
Example
During the period of September 1, 2020 through December 31, 2020 Employer defers the withholding of employee share of social security taxes for Employee A totaling $1,200 of taxes.
During the period of January 1, 2021 through April 30, 2021, Employer must ratably withhold the $1,200 from Employee A’s gross pay in addition to the employee’s regular social security withholding. This effectively doubles the withholding of EE social security taxes during the repayment period. There is no guidance addressing how to handle repayment If Employee A quits on January 1, 2021, however, Employer appears responsible for repaying the deferred taxes regardless of Employee A’s employment status.
The Treasury is limited in its ability to implement the payroll tax deferral, utilizing a code section which only allows the President to defer time for withholding. Absent legislation, the Treasury can only “do so much” to provide guidance on a program which the Department otherwise does not have the authority to create.
Applicable Wages
During the period of September 1, 2020 through December 31, 2020 an employer may defer withholding EE social security tax if an employee’s gross wages are less than $4,000 for a bi-weekly pay period, or the equivalent amount with respect to other pay periods (i.e. $2,000 for a weekly pay period). The $4,000 threshold is determined on a pay period-by-pay period basis, irrespective of gross wages for prior or future periods.
The $4,000 threshold amount has a “cliff” effect making an employee ineligible for deferral on all wages for any pay period during which the employee’s gross pay meets or exceeds the threshold.
Example
Employee A’s gross payroll for the biweekly pay period ending September 18, 2020 is $3,700. Employee A receives a bonus during the biweekly pay period ending October 2, 2020 which brings gross pay to $4,200.
Employer may defer the withholding and deposit of the employee share of social security tax on the biweekly pay period ending September 18, 2020 since gross pay is less than the $4,000 threshold amount. Employer may not defer the withholding and deposit of EE share of social security tax on any of the wages for the October 2, 2020 payroll since gross pay exceeds the threshold amount.
If the employee’s biweekly payroll returns to $3,700 in subsequent weeks, the employer may again defer the withholding and deposit of EE social security tax, since the eligibility is determined on a pay period-by-pay period basis.
Employer Decision
Whether to participate in this EE social security tax deferral seems optional* for the employer. An employer does not appear to be required to defer withholding of the EE social security during the September 1, 2020 through December 31, 2020 period. Employers may continue to withhold and deposit payroll taxes as they have always done, employees do not appear to have the ability to “force” an employer to participate.
For those that plan to forgo this deferral program, keep in mind that if Congress does eventually forgive the deferred EE social security taxes, the forgiveness may only end up being for amounts already deferred, thereby prohibiting employees from going back and requesting a refund on taxes already deposited.
*While the Notice does not describe the deferral as optional, a statement from the Treasury describes the Notice as “allowing” employers to defer withholding. This interpretation is consistent with Secretary Mnuchin’s comments from a couple weeks ago stating that “we cannot force people to participate.”