IRS Issues Guidance on Payroll Tax Deferral

On August 28, 2020, the IRS issued guidance (Notice 2020-65) implementing President Trump’s August 8 Presidential Memorandum on the deferral of the withholding, deposit and payment of the employee share of social security tax.

The Notice confirms that the relief described in the Presidential Memorandum is a deferral and not a tax holiday.  Specifically, the obligation to pay such payroll taxes with respect to wages for the period September 1, 2020 through December 31, 2020 is postponed until the period beginning January 1, 2021 and ending April 30, 2021, during which time the deferred taxes are to be withheld and collected ratably from wages paid (in addition to the normal payroll taxes on those wages).  Interest, penalties and additions to tax will begin to accrue on May 1, 2021 on any unpaid payroll taxes.  The burden is on the employer to pay the deferred tax before May 1.

The deferral can apply to any employee whose pre-tax wages payable on a pay date during the September 1- December 31, 2020 period for a bi-weekly pay period is less than $4,000 (or the equivalent threshold amount with respect to other pay periods).  Note that the eligibility for the deferral is made on a pay period-by-pay period basis.  So, an employee can qualify for one period and not the next if, for example, he/she receives a bonus that puts the employee over the threshold, but qualify again in a subsequent period. 

The Notice is silent as to what happens to employees that leave the employ, though it does state that, if necessary, employers “may make arrangements” to otherwise collect the deferred taxes from employees. 

It would appear that employers can determine whether or not to participate in this tax deferral initiative, but it is unclear whether employees can opt out if the employer adopts the program.

Also, given that the Trump administration would like these deferred taxes to ultimately be forgiven (dependent on the upcoming Presidential and Congressional election), another unknown is whether an employee would be prevented from that possible forgiveness if the employee’s payroll tax is not deferred (because the employer chose not to participate or the employee opted out). 

More guidance from the IRS can be anticipated.