Guidance on payroll deferral memorandum leaves questions unanswered

| 8/31/2020
Guidance on payroll deferral memorandum leaves questions unanswered

On Aug. 28, the U.S. Department of the Treasury and the IRS issued Notice 2020-65 to implement an Aug. 8 executive memorandum directing Treasury to use its authority under IRC Section 7508A to “defer the withholding, deposit, and payment of” the 6.2% employee portion of Social Security tax on certain wages paid between Sept. 1, 2020, and Dec. 31, 2020.

The memorandum directs Treasury to make available the deferral to any employee with less than $4,000 of applicable pretax wages payable during any biweekly period (or the equivalent amount for other pay periods) and to permit the deferral without any penalties, interest, additional amount, or addition to tax. The notice provides a bit more detail on the wages eligible for the tax deferral, and it postpones withholding (and related deposit penalties if no withholding occurs) of the eligible tax during the deferral period. While the notice does not mandate the deferral, it requires implementing employers to withhold and deposit the deferred amounts between Jan. 1, 2021, and April 30, 2021. However, the notice leaves unanswered significant questions on which guidance is needed.

Applicable wages

The wages to which the tax deferral can apply are limited to “applicable wages.” Generally, these are wages paid between Sept. 1, 2020, and Dec. 31, 2020, that otherwise are subject to withholding of the employee’s share of 6.2% Social Security tax, but only if the employee’s wages for a pay period do not exceed a threshold ($4,000 for a biweekly pay period or an equivalent for other pay periods). Although the notice provides that a threshold amount equivalent to $4,000 paid biweekly applies in the case of other pay periods, it does not specify how that amount is to be computed. The notice provides that applicable wages are determined separately for each pay period, meaning that an employee’s wages in one pay period may be eligible for deferral of the employee’s share of Social Security tax even if that employee’s wages in other pay periods are not applicable wages.

Sign up to receive the latest tax insights as well as tax regulatory and administrative updates.

Collection and deposit of deferred tax

When the deferral period ceases, the collection period begins. If an employer applies the deferral to any employee’s applicable wages, the notice requires the employer to ratably withhold and deposit the deferred taxes from that employee’s wages paid from Jan. 1, 2021, through April 30, 2021. Under current law, such wages already are subject to withholding of the employee’s share of 6.2% Social Security tax and 1.45% Medicare tax, along with federal and state income taxes. This means the employer also must withhold an additional 6.2% against that employee’s wages during the required collection period.

Consistent with present law’s imposition of liability on the employer for failure to withhold and deposit payroll taxes, the notice provides that the employer remains liable for the employee’s share of Social Security tax that was deferred. Accordingly, interest and penalties accrue beginning on May 1, 2021, with respect to any deferred tax not timely collected and deposited during the collection period.

Unanswered questions

Notice 2020-65 does not address numerous questions including, but not limited to, how to properly implement the deferral, how to report deposits, and how to report the deferred taxes for purposes of quarterly payroll filings and Form W-2s with respect to both the deferral period and the collection period.

The notice does not address or resolve most of the issues and concerns raised when the memorandum was issued. Many employers and payroll administrators indicated that changes to systems cannot be implemented in time. Tax advisers raised numerous technical issues and potential pitfalls for employers and employees. Human resource advisers foresaw employee relations issues, particularly when the time comes to collect the deferred taxes. In addition, the notice does not provide relief from current law that puts employees on the hook in their personal income tax returns for any deferred taxes not collected or paid by the employer.

The notice mentions that “if necessary” an employer may arrange with an employee to otherwise collect the deferred tax. Typically, such arrangements mean obtaining a check directly from the employee, but the employees to whom this deferred tax applies are not high earners. An employer also may pay the tax on the employee’s behalf, resulting in additional wages subject to the various tax withholdings described. In order to make the employee whole, the employer could “gross up” the employee for those tax withholdings, but the resulting expense to the employer far exceeds the deferred tax paid on the employee’s behalf.

There seems to be little advantage to implementing and administering the deferral given the uncertainty of compliance and the costs and hassles of rushing to put in place a short-lived program that – come collection time – could result in imposing hardship on employees and increasing employer costs to smooth over employee relations.

Related topics

Election 2020

Election 2020

News and analysis on presidential candidates' proposals from our tax policy specialists.

Tax optimization strategies

Tax optimization strategies

See how you can use tax strategy to increase liquidity and gain cash flow.

Election 2020

Election 2020

News and analysis on presidential candidates' proposals from our tax policy specialists.

Tax optimization strategies

Tax optimization strategies

See how you can use tax strategy to increase liquidity and gain cash flow.

Contact us

Our experienced tax professionals can help you tackle your most pressing tax challenges. Contact the Crowe tax team today.
Veena Murthy
Veena Murthy
Principal, Washington National Tax