This article was updated on September 4, 2020
On August 28, 2020, the IRS issued Notice 2020-65 providing guidance on the executive order issued by President Trump on August 8, 2020, that directed Treasury Secretary Mnuchin to defer the withholding, deposit, and payment of the employee portion of Social Security taxes paid on certain wages starting September 1, 2020, through December 31, 2020.
See our prior Alert for more information on the order which left employers with many questions.
Notice 2020-65 does address some of those questions, but is still likely to leave employers with continued implementation challenges given the starting date is for pay dates beginning September 1, 2020.
The notice broadly identifies all employers required to withhold and pay the employee share of Social Security tax—including the Railroad Retirement tax equivalent—as affected taxpayers under the order and the notice.
For affected taxpayers, the due date for the withholding and payment of the employee portion of the applicable taxes—the Social Security tax and Railroad Retirement tax equivalent—on applicable wages as defined below is postponed until the period beginning January 1, 2021, and ending April 30, 2021.
Please note, the deposit obligation doesn’t arise until the taxes are withheld. Consequently, if an employer withholds the taxes, they must be deposited.
As defined in Section 3121(a) and Section 3231(e), applicable wages are wages and compensation paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020. The definition only applies if the amount of such wages or compensation paid for a bi-weekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods—for instance, $4,333 if paid twice a month. Annually, this amounts to $104,000.
Amounts excluded from wages or compensation under Sections 3121(a) or 3231(e) aren’t included when determining applicable wages.
Eligibility is determined each pay period. If applicable wages payable to an employee for a pay period is less than the corresponding pay period threshold amount, then the applicable taxes related to those wages are eligible for the relief provided in this notice for that pay period—regardless of whether the employee was eligible in other pay periods.
The notice doesn’t address Social Security taxes for self-employed individuals and, as such, deferral isn’t available for those who aren’t employees earning wages as described above.
Employers must withhold the taxes deferred under this notice ratably from the employee’s wages and compensation paid between January 1, 2021, and April 30, 2021.
Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any deferred taxes. If necessary, employers may make arrangements to otherwise collect the deferred taxes from the employee.
Some of the questions raised in our prior Alert are addressed by the notice, but there are still concerns about how employers would implement the deferral.
Deferral as Opposed to a Tax Cut
The notice allows employers to postpone the deadline for the withholding, deposit, and payment of the employee portion of Social Security taxes on applicable wages. It also confirms the executive order is simply a deferral—not a payroll tax cut—with repayment starting January 1, 2021.
The notice clarifies the deferral is only available to those employees with applicable wages below the $4,000 bi-weekly threshold. For those with applicable wages in excess of this threshold, no amount is eligible for deferral.
The notice doesn’t provide guidance for employees that may have more than one employer; it appears an employer isn’t obligated to confirm if the employee earns wages elsewhere when determining the employee’s eligibility.
To repay the deferred taxes, the notice provides the employer must withhold and pay the taxes deferred ratably over the four-month period beginning January 1, 2021, with interest, penalties, and additions to begin on May 1, 2021.
Further, the notice provides that, if necessary, the employer “may make arrangements to otherwise collect the applicable taxes from the employee.”
The repayment provision will likely concern employers as the notice requires the affected taxpayer— the employer—to remit the taxes deferred. This will likely create administrative challenges for employers if an employee leaves before the deferred taxes are fully collected.
It could also leave employers ultimately responsible for payment if they are unable to recover the deferred amounts from the employee. The notice doesn’t provide a mechanism for the taxes to be collected by the IRS directly from the employee.
While the notice doesn’t definitively state that compliance by employers is optional, the IRS news release suggests it isn’t required by its use of permissive language that the deferral is “available” and that employers “may apply” the deferral to the applicable tax payments. After the issue of the notice, an IRS attorney confirmed that employers may, but aren't required, to utilize the relief.
Employers should consider consulting with their employment attorney and payroll tax provider to determine their responsibilities and options for administration under the notice.
We’re Here to Help
If your organization has any questions related to the payroll tax deferral and subsequent IRS guidance, please contact your Moss Adams professional.