On August 8, 2020, President Trump signed an Executive Memorandum instructing Treasury to issue guidance to allow employees to defer payroll taxes September 1 through the end of the year. The Treasury has finally released this guidance with Notice 2020-65.
What is included in Notice 2020-65?
- While this is to be a benefit for employees, the Notice identifies the employer as the affected taxpayer. Therefore, the employer has the responsibility to implement the Notice.
- Much like the Executive Memorandum, the Notice defers the withholding of the 6.2% Social Security tax on the employee applicable wages.
- Only employees with wages not exceeding $4,000 for a bi-weekly payroll period will be eligible for the deferral. The qualification is measured independently for each pay period. Therefore, an employee will qualify if their wages are less than $4,000 for a pay period even if they don’t qualify for other pay periods because their wages are greater than $4,000 for those other periods...
- The deferred amount must be withheld from the employee wages and repaid ratably between January 1, 2021 and April 30, 2021. Penalties and interest will begin to accrue on May 1, 2021 for any deferred amounts not paid by April 30, 2021.
The Executive Memorandum and Notice are issued pursuant to the disaster relief provisions. Much like other disaster relief provisions, this is not a mandatory provision, but simply an option for employers to utilize. While the federal government’s executive branch has indicated they will be deferring withholding, some companies have already come forth and indicated they will not be. Some items to consider when deciding whether to defer withholding as an employer include:
- This is only a deferral of taxes for the employee. While employees may see an increase in take home pay for the next 4 months, they will also experience a decrease in take home pay for the first 4 months of 2021. The 2021 reduction in net pay may create an economic hardship for employees that depend on their entire paycheck.
- President Trump has indicated that he would like to see this deferred amount forgiven, which would take an act of Congress to accomplish. Congress has yet to show a desire to provide any payroll tax holiday this year. What happens if an employer decides not to defer the current withholding, and then Congress decides to forgive the deferred amounts?
- What happens if the employee is no longer employed by the same employer or is a seasonal employee and not working during the period of January 1, 2021 and April 30, 2021? The Notice indicates that the employer “may make arrangements to otherwise collect the total Applicable Taxes from employee”. Can the employer withhold the amount in their final paycheck? What if the final paycheck is not enough to cover the deferred amounts? Does the employee or employer then owe the shortage?
- How will employees react if their employer decides not to defer the withholding on their behalf? Or conversely, maybe not every employee would want to have their taxes deferred.
Whether an employer decides to defer withholding or not, an employer should consider communication to their employees regarding this issue. Communication should include the fact that this is just a deferral which will be repaid in early 2021. If the employer will be deferring withholding, the plans to recoup the deferral, including what will be done if there is a change in the employment relationship should be communicated as well.