On August 28, the IRS issued Notice 2020-65 on the deferral of employee payroll tax obligations, as originally described in the Trump Administration’s Executive Memorandum dated August 8. The brief guidance provides employers with basic information on key items, including how repayment is to be made and the definition of compensation for purposes of the eligibility threshold.
What payroll taxes may be deferred?
Employers can defer the withholding, deposit1, and payment of the employee portion of the Old Age, Survivors, and Disability Insurance segment of FICA taxes, i.e., the 6.2% tax on employee wages imposed by section 3101(a) of the Internal Revenue Code and the equivalent amount under the Railroad Retirement Tax Act (RRTA) imposed by section 3201(a). The deferral applies to taxes on wages paid from September 1, 2020, through December 31, 2020. The payroll taxes are deferred, not forgiven.
Are employers required to defer withholding employee payroll taxes?
The Notice does not directly state whether the payroll tax deferral is optional for employers. However, based on the authority on which the guidance relies, it appears that employers can choose whether to implement the deferral. The Notice relies on section 7508A of the Internal Revenue Code, which authorizes the IRS to postpone deadlines for various acts, but does not permit the IRS to prohibit the timely withholding and payment of taxes. Consistent with section 7508A, the IRS and Treasury press releases use permissive language to describe the guidance as “allowing” deferral and “available” to employers.
The Notice does not apply to employees. Only “employers that are required to withhold and pay the employee share of social security tax” (and the equivalent RRTA provisions) are designated as “Affected Taxpayers” for purposes of section 7508A.
| Eversheds Sutherland Observation: Designation as an “Affected Taxpayer” in published IRS guidance with respect to a particular disaster is required to trigger deferral of an obligation under section 7508A.2 Because the Notice does not designate employees as “Affected Taxpayers,” it appears that the IRS did not intend to grant employees an independent right to defer withholding, deposit and payment of the employee portion. This is consistent with case law holding that employees do not have a private right of action against their employers under the social security provisions.3 However, there appears to be no prohibition on an employer providing an employee with the option to defer (or not defer) the employee portion. |
How are the deferred taxes paid?
The Notice provides that employers must withhold and pay any deferred payroll taxes from employee wages and compensation paid from January 1, 2021, through April 30, 2021, on a ratable basis. The Notice also states that “[i]f necessary,” employers can “make arrangements to otherwise collect” the deferred taxes. If any deferred payroll taxes are not repaid by April 30, interest, penalties, and additions to tax will begin to accrue May 1.
| Eversheds Sutherland Observation: Employers that implement the deferral will need to address situations in which employees with deferred taxes terminate employment before the deferred taxes are collected (i.e., later in 2020 and before April 30, 2021). Employers will likely want to structure “arrangements to otherwise collect” the deferred taxes in this circumstance, such as by collecting the taxes from a final paycheck or by separate check from the employee. Employers should consider state wage payment laws and other limitations in developing plans for this situation. |
How is eligibility for deferral determined?
The payroll tax deferral is available with respect to employees who have wages and compensation of less than $4,000 in a given biweekly payroll period during the September 1 to December 31 deferral period, or an equivalent amount for other payroll periods. For this purpose, wages are equal to Form W-2, Box 3 wages, i.e., wages subject to FICA taxes, which includes elective deferrals to 401(k) plans. As a result, an employee with variable pay (e.g., commissions, overtime, or a bonus) could be eligible for deferral in one payroll period in which he or she has less than $4,000 of pay, but not eligible in the next payroll period.
| Eversheds Sutherland Observation: This formulation of the compensation eligibility threshold is somewhat different than the wording in the Executive Memorandum, which referred to compensation “generally” less than the threshold. The more precise definition has the advantage of being objective and readily determinable, but it could be challenging to ensure that payroll systems can turn on and off the deferral as employees rise above and drop below the threshold. |
How will further questions be addressed?
The Notice does not contain specific information regarding the principal authors of the Notice, but instead states that it was drafted by attorneys of the Office of Associate Chief Counsel, Employee Plans, Exempt Organizations, and Employment Taxes, with the participation of staff from other offices. For further information, taxpayers are directed to call Notice 2020-65 Hotline at (202) 317-5436.
| Eversheds Sutherland Observation: The “hotline” number provided in the Notice is the same number provided in other notices implicating section 7508A and has also been referred to as the COVID-19 Disaster Relief Hotline. However, previous section 7508A notices also specifically identified a principal drafter or drafters of the Notice. |
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1 The regulations under section 7508A prohibit the deferral of the deposit obligation pursuant to section 7508A. See Treas. Reg. § 301.7508A-1(c)(ii). The Notice addresses this potential issue in a footnote, reasoning that under the deposit regulations, the obligation to deposit does not arise until the tax is withheld. The Notice takes the position that deferral of withholding also defers the obligation to deposit by operation of law.
2 See section 7508A(a); Treas. Reg. § 301.7508A-1(b)(1) & (d)(1); Rev. Proc. 2018-58, § 4.01.
3 See, e.g., McDonald v. Southern Farm Bureau Life Insurance Co., 291 F.3d 718 (11th Cir. 2002).
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