Payroll Tax Deferral Executive Order: How It Works and Employer Considerations
On August 8, 2020, President Trump signed an executive order directing the U.S. Department of the Treasury to defer certain payroll tax obligations in light of the ongoing COVID-19 pandemic. The deferral is effective September 1, 2020 through December 31, 2020. The payroll tax obligation affected by the deferral is the employee’s share of the social security tax pursuant to Internal Revenue Code section 3102(a). Employees who may be affected by the payroll tax deferral are those whose biweekly wages are less than $4,000 (on a pre-tax basis), or the corresponding pay period threshold amount for pay periods other than bi-weekly (e.g., $2,000 per week or $8,000 per month).
The Internal Revenue Service (“IRS”) issued Notice 2020-65 (Notice) to provide guidance on the payroll tax deferral on August 28, 2020. Any employer required to withhold and pay the employee share of the social security tax is deemed to be affected by the pandemic and may choose to defer the withholding of eligible employees’ payroll tax. It is important to note that the Notice does not specifically state the deferral is optional, but the wording of the Notice implies that employers have flexibility in implementing the payroll tax deferral. Also, Treasury Secretary Steven Mnuchin publicly stated that the payroll tax deferral is voluntary. Thus, the current view is that employers have discretion whether to stop withholding the social security tax starting September 1, 2020. It also appears that employers may choose to implement the payroll tax deferral company-wide for eligible employees, on an employee-by-employee basis, or not at all.
The Notice requires employers who defer withholding the payroll tax to pay the deferred taxes to the IRS between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on the unpaid payroll taxes beginning on May 1, 2021. The Notice also permits employers to make arrangements to collect the total deferred payroll taxes from the employee. Thus, employers may withhold a larger portion of the social security tax from employees who deferred the payroll tax beginning on January 1, 2021, in order to pay the deferred tax before April 30, 2021.
While the Notice provides some guidance, it is not complete. And it has caused confusion and uncertainty for employers.
The Notice does not address whether employers must honor requests by employees to have their social security taxes deferred. But, again, the current view is that it is up to the employer whether to provide the payroll tax deferral.
The Notice also does not release employers from liability for deferred payroll taxes that they are later unable to collect. For example, if an employee is no longer employed by the employer in January 2021, the employer will likely need to repay the deferred taxes from its own coffers. The employer could try to collect the deferred payroll taxes from its former employees, but, at least in California, such an approach is at the least problematic and also potentially unfruitful. One option to consider before implementing the deferral is to have eligible employees sign an agreement whereby the employees expressly agree to repay their portion of the deferred payroll taxes, even if they separate from the company.
Additionally, for employees who remain employed by the employer, there may be a negative reaction from employees who must later repay the deferred amounts via deduction in payroll, particularly during the ongoing pandemic. Again, it may be beneficial to have an agreement outlining the expectations and responsibilities of the employer and employees for repayment of the deferred payroll taxes.
These are uncertain times for both employers and employees. Unfortunately, the federal guidance for the payroll tax deferral leaves many questions unanswered. Employers should work with legal counsel to determine how and when it should implement the guidance in the Notice. Please contact Dunn DeSantis Walt & Kendrick LLP with any questions.