IRS Issues Guidance On Presidential Memorandum Authorizing Payroll Tax Deferral
Late last Friday, August 28, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-65 which contains long-awaited guidance on the payroll tax deferral authorized by the presidential memorandum issued on August 8, 2020 (“Presidential Memorandum”). See here for our client alert on the Presidential Memorandum. While IRS Notice 2020-65 provides some guidance and clarification regarding the Presidential Memorandum, there unfortunately remain many issues and questions.
The Presidential Memorandum authorizes employers to defer the withholding, deposit, and payment (collectively, “Deferred Withholding”) of an employee’s share of the Old Age, Survivors and Disability Insurance taxes (“Social Security Taxes”) on wages paid during the period September 1, 2020 through December 31, 2020.
Notably, an employer has no obligation to implement Deferred Withholding, and employees have no right to require the employer to implement Deferred Withholding. This decision may be made in the sole discretion of the employer.
Of additional note is that these taxes are only deferred – they are not forgiven. Any forgiveness would be subject to legislation, as neither the Treasury Secretary nor the President has authority to forgive the taxes.
IRS Notice 2020-65 clarifies when the taxes are to be withheld and deposited if an employer elects to implement Deferred Withholding. Specifically, employers must “ratably” withhold any deferred employee Social Security Taxes from wages paid to employees during the period of January 1, 2021 through April 30, 2021, or have interest, penalties and additions to tax accrue beginning May 1, 2021.
Conspicuously absent from the IRS guidance is any clarification as to the steps an employer is to take if the employer is unable to withhold taxes from an employee’s paycheck during January 1, 2021 through April 30, 2021 for any reason. For example, what if an employee’s employment has terminated, he or she is on a leave of absence, or he or she has insufficient wages from which to make the required deductions? The only guidance IRS Notice 2020-65 provides is that an employer may, if necessary, “make arrangement to otherwise collect” the deferred taxes. Unfortunately, unless legislation is enacted to forgive these taxes, the employer ultimately will be responsible for paying the Deferred Withholding to the IRS if the employer is unable to collect from employees.
IRS Notice 2020-65 also clarifies how wages are to be determined in identifying which employees are potentially eligible for this payroll tax deferral. The Presidential Memorandum states that deferral of an employee’s share of Social Security Taxes only applies to an employee whose wages are generally less than $4,000 (pre-tax) per bi-weekly pay period. IRS Notice 2020-65 confirms that the maximum wage limitation, and thus an employee’s eligibility for the payroll tax deferral, is determined on a payroll-by-payroll basis for an employee whose compensation fluctuates during the deferral period. It also clarifies that the $4,000 pre-tax wage limit is to be calculated without taking into account items not includable as wages under Internal Revenue Code Sections 3121(a) and/or 3231(e), which would include, for example, some pre-tax deductions such as the employee’s share of contributions to health plan premiums and certain flexible spending accounts.
Additionally, IRS Notice 2020-65 clarifies that, if an employer does withhold taxes from the employees’ wages, the employer must deposit those taxes with the IRS in accordance with the employer’s regular tax deposit schedule. IRS Notice 2020-65 states that neither the Presidential Memorandum nor IRS Notice 2020-65 postpones the deposit obligation if the taxes are withheld from employees’ paychecks. Instead, it is by “postponing the time for withholding the employee social security tax” that the tax deposit obligation is delayed.
Employers face a difficult decision whether to implement Deferred Withholding. If employers elect not to do so, there may be employee relations issues in that many employees may assume they are entitled to Deferred Withholding. Employers need to weigh employee relations issues against the potential liability employers may incur if (i) legislation is not enacted to forgive the taxes, and (ii) employers are not subsequently able to withhold the Deferred Withholding from employees’ pay.
If you have questions on the presidential memorandum or the payroll tax deferral, you can reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.