On August 8, 2020, President Trump issued the Presidential Memorandum on Deferring Payroll ‎Tax Obligations in Light of the Ongoing COVID-19 Disaster (the “Executive Order”). The ‎Executive Order instructed the Treasury Department to provide guidance authorizing employers ‎to defer the collection and deposit of employee payroll tax obligations. On August 28, 2020, the ‎Internal Revenue Service (“IRS”) issued IRS Notice 2020-65 (the “Notice”), which provides ‎guidance to employers regarding how they may implement the Executive Order.‎

Overview of the Rules

The Notice authorizes employers to defer the withholding, deposit, and payment of the employee ‎portion of the Old Age, Survivors, and Disability Insurance segment of FICA taxes (i.e., the ‎‎6.2% payroll tax)^‎1‎ on wages paid from September 1, 2020 through December 31, 2020 (the ‎‎“Applicable Period”). ‎

The tax deferral applies to employees with wages and compensation below $4,000 for a bi-‎weekly payroll period during the Applicable Period, as determined based on Box 3 of IRS Form ‎W-2 (which includes elective deferrals to an employer’s 401(k) plan but excludes amounts ‎deducted under Section 125 of the Internal Revenue Code to fund benefit plan premium ‎payments, contributions to an employee’s health savings account, or contributions to a flexible ‎spending account). This amount is adjusted for employers who use a different payroll cycle. The ‎Notice provides that the deferral is determined based on the specific payroll period and does not ‎look to the amount of wages in prior payroll periods.‎

• Note: since this determination is made on a payroll period basis, an employee who ‎receives variable compensation (e.g., overtime, bonuses or commissions) may be ‎eligible for this deferral during some payroll periods but not others. This may ‎create issues for an employer’s payroll system.‎

An employer is required to collect and deposit the deferred tax amount during the period ‎between January 1, 2021 and April 30, 2021. The Notice contemplates that the employer will ‎collect the deferred taxes from employees through increased wage withholding ‎occurring ratably ‎during the four month collection period. To the extent the deferred tax amount is not deposited ‎during that period, interest and penalties will begin to accrue on the unpaid amount on May 1, ‎‎2021.‎

Following the release of the Notice, the IRS released a draft version of a revised Form 941, ‎Employer’s Quarterly Federal Tax Return, to take into account the Social Security withholding ‎that is deferred.‎

Key Issues and Questions

‎1. Is this mandatory? The Notice does not state whether employers are required to ‎implement this payroll tax deferral for their employees. Section 7508A of the Code, which is the ‎basis for this guidance, permits the IRS to postpone deadlines for various acts (including, as ‎stated in the guidance, tax withholding) but does not permit the IRS to prohibit timely ‎withholding and payment of taxes. As such, this should be optional for employers. That ‎conclusion is consistent with the press releases issued by the IRS and the Treasury Department, ‎which state that this form of relief is “available” to employers, and statements from ‎Administration officials.‎

• Due to the high level of publicity regarding this issue, the availability of payroll ‎tax deferral may create a communications issue for an employer who does not ‎elect to implement deferrals. As a result, employers who do not implement payroll ‎tax deferrals may decide to prepare an explanation for their employees regarding ‎the decision not to defer payroll taxes.‎

2. Can employees require an employer to permit them to defer their taxes? As noted above, ‎the Notice authorizes employers to defer withholding, deposit and payment of the employee ‎portion of payroll taxes. It does not contain any guidance allowing employees to elect to defer ‎these tax payments. As a result, an employer has a right to decide whether to use this form of ‎relief. ‎

‎3.‎ Can an employer allow employees to elect to defer their taxes? Probably. The Notice ‎does not address whether the election to defer withholding, deposit and payment of the ‎employee portion of payroll taxes must be made on a uniform basis for all employees. It also ‎does not contain any guidance regarding whether an employer can allow an employee to elect to ‎defer these tax payments. As a result, an employer may be able to permit deferrals based on an ‎employee’s election. ‎

• If an employer makes this deferral elective, it also could require an employee to ‎agree that the employer is permitted to withhold the unpaid portion of any ‎deferred taxes from an employee’s final paycheck. As noted below, however, an ‎employer should review its ability to enforce that type of agreement under ‎applicable state law. ‎

4.‎ What happens if the employer cannot withhold the deferred taxes from an employee? ‎The Notice requires the employer to repay such deferred taxes by withholding such amounts ‎from an employee’s future compensation payments. As a result, the employer will be required to ‎pay this amount on or before April 30, 2021, even if an employee with deferred taxes is ‎terminated, is furloughed, or goes on an unpaid leave of absence, before the deferred taxes are ‎collected. If that occurs, the Notice provides that an employer may make arrangements to ‎‎“otherwise collect” this amount from its employees. ‎

• Employers may elect to withhold this amount from an employee’s severance ‎payment or final paycheck. This action, however, may be limited by applicable ‎state wage payment laws or collective bargaining arrangements. That issue should ‎be considered carefully by an employer who wishes to adopt this type of action.‎
• An employer might address this situation by allowing its employees to elect to ‎participate in a payroll tax deferral program and conditioning such participation on ‎execution of a repayment agreement. That type of agreement should be reviewed ‎for compliance with applicable state law. ‎
• If an employer ultimately pays the deferred tax obligation on behalf of the ‎employee, the payment would be considered additional compensation to the ‎employee. As such, it is likely that the employer will need to increase the payment ‎amount to fund income and employment taxes on this amount.‎

‎5.‎ How will this work? The mechanical aspects associated with implementing payroll tax ‎deferrals under the Notice are critical. At a minimum, an employer’s human resources ‎information system and/or payroll tax provider will need to revise the employer’s payroll system ‎to not withhold payroll taxes from payments which are below the $4,000 limit provided in the ‎Notice. Given the timing involved, that may be difficult to accomplish and it may require ‎manual intervention to make this work from an operational perspective. ‎

6.‎ How does this affect the employee retention credits and payroll tax deferral under the ‎CARES Act and the paid sick and family leave credits under the Families First Coronavirus ‎Response Act? It is unclear how this payroll tax deferral will affect payroll-related credits. The ‎Notice did not provide any guidance regarding this issue.‎

‎7.‎ Is this worth the effort? Maybe. Under the current guidance, the Notice effectively ‎provides an interest-free loan to employees by allowing them to defer payment of their payroll ‎taxes for four months. As such, there is a “time value of money” benefit for an employee. ‎

• If there is a future change in law, this deferral opportunity could become ‎permanent. That future change in law would, most likely, address the treatment ‎of employees who did not benefit from the deferral opportunity. While we would ‎anticipate that those individuals would be able to obtain a refund of payroll taxes ‎paid during the Applicable Period, it is possible that the relief provided by a ‎future change in law will be more limited. ‎
• If there isn’t a change in law to make this deferral opportunity permanent, the ‎administrative complexity involved in making a significant change to an ‎employer’s payroll system, combined with the risk that an employer will be unable ‎to collect the deferred tax amount from terminated and/or furloughed employees, ‎may outweigh the fairly limited value received by the employees. ‎

---
_{1 Section 3101(a) of the Internal Revenue Code of 1986, as amended, and the equivalent amount under the ‎Railroad ‎Retirement Tax Act under Section 3201(a) ‎ of the Internal Revenue Code of 1986, as amended.‎}