On August 28, 2020, the Internal Revenue Service (“IRS”) issued Notice 2020-65 (the “Notice”) as its guidance on implementing the Memorandum on Deferring Payroll Tax Obligations in Light of Ongoing COVID-19 Disaster signed by President Trump on August 8, 2020 (the “Payroll Tax Memo”). As described in a previous post, the Payroll Tax Memo left many unanswered questions that made it difficult for employers to determine whether to implement the payroll tax deferrals for employees. Unfortunately, as described below, the Notice only provides limited guidance, and many of the difficult questions remain unanswered, which puts employers in a difficult spot with the deferral potentially applying to wages paid starting on or after September 1, 2020.
The Payroll Tax Memo directs the Secretary of the Treasury to use his authority to defer withholding, deposit, and payment of certain Federal Insurance Contribution Act or “FICA” taxes owed by certain employees for wages paid between September 1, 2020 and December 31, 2020 (the “Deferral Period”), subject to the following conditions:
- The deferral is only permitted for employees whose bi-weekly pre-tax compensation is less than $4,000 (or the equivalent amount with respect to other pay periods); and
- Amounts deferred shall be deferred without any penalties, interest, additional amounts or additions to the tax.
While the Payroll Tax Memo noted the permissible deferral, it did not answer when or how such deferred taxes would need to be repaid. The Notice does answer this question by clarifying that any taxes that are deferred during the Deferral Period pursuant to the Payroll Tax Memo must be withheld by the employer from wages paid to the employee from January 1, 2021 through April 30, 2021 and remitted during such period to repay the deferral (or interest and penalties will begin to accrue as of May 1, 2021). This means that employees will have approximately 12.4% for the Social Security portion of FICA taken out of wages paid during the first four months of 2021 rather than the normal 6.2% for Social Security (please see the previous post for a more detailed and complete description of FICA taxes).
The Notice still does not make clear whether it is the employer or the employee who gets to decide whether to defer the taxes? Additionally, the Notice does not clarify what happens if an employee terminates employment prior to repayment. Does the employer need to repay such amounts on behalf of terminated employees?
The limited guidance from the IRS in the Notice puts employers in a difficult position. Employers must act fast if they want to implement the deferral with the Deferral Period already starting just a few days after the Notice was issued. While it would be helpful for employees to benefit from an increase in the net amount of their paychecks during the Deferral Period, such employees who deferred taxes would then start 2021 with an immediate drastic reduction in the net amount of their paychecks with approximately 12.4% being taken for the Social Security portion of FICA rather than the usual 6.2%. This would put employers in the difficult position of having unhappy employees in 2021 when the taxes increase drastically. Plus, employers who choose to implement this payroll tax deferral without additional guidance must understand that there is risk that the employer will be stuck repaying such amounts for employees who terminate prior to repayment.