On Friday, August 28, the IRS released Notice 2020-65 (the “Notice”), which provides limited guidance to employers considering whether and how to implement the President’s August 8 Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (the “Memorandum”). The Memorandum had directed the Secretary of the Treasury (“Secretary”) to use his statutory authority to defer the withholding, deposit, and payment of the employee portion of social security tax for employees making less than $4,000 during any bi-weekly pay period after September 1, 2020, through the end of the year, and directed the Secretary to issue implementing guidance. The three-page Notice checks those boxes but fails to conclusively answer many important legal and practical questions left open by the Memorandum.
What does the Notice clarify?
- The employer is the Affected Taxpayer for purposes of Internal Revenue Code (“Code”) Section 7508A (the provision which enables the Secretary to postpone deadlines for taxpayers affected by federally-declared disasters);
- The employer’s due date for the withholding and payment of the employee portion of social security tax on “Applicable Wages” is postponed until the period beginning January 1, 2021 and ending on April 30, 2021;
- “Applicable Wages” are Code sections 3121(a) and 3231(e) wages (the wages that are subject to the $137,700 social security wage base) paid to employees earning less than $4,000 in any bi-weekly pay period (or its equivalent amount in the cases of weekly or semi-monthly pay periods), determined on a pay-period by pay-period basis; and
- The employer’s tax obligation is suspended, but not forgiven, and must be collected ratably from the employee’s pay in the period January 1, 2021 through April 30, 2021 and remitted to the IRS by May 1, 2021, to avoid the assessment of interest and penalties, etc. on the employer. (The employer is liable for the tax due.)
Does my organization have to implement the deferral contemplated by the Notice?
No. The employee portion of social security tax is imposed by Code section 3101(a), and Code section 3102 provides that the employer is the party liable for assessment in the event the tax is not properly withheld and paid. The Notice applies to the employer and merely postpones this tax obligation for four months.
The regulations accompanying section 7508A provide, in relevant part, that “[w]hen an affected taxpayer is required to perform a tax-related act by a due date that falls within the postponement period, the affected taxpayer is eligible for postponement of time to perform the act until the last day of the period.” Thus, the act of postponing the obligation to withhold and pay the tax imposed by section 3101(a) does not obviate the employer’s choosing to simply pay the tax at the time it would have been due originally (which is triggered by the act of withholding). This interpretation is consistent with the plain meaning of the term “postpone” and with pre-Notice public comments made by Secretary Steven Mnuchin to the news media that the deferral is intended to be elective for employers. There are also a myriad of other likely reasons why the White House, Treasury Department and the IRS chose to implement the Memorandum and the Notice in this way, ranging from constitutional and administrative law litigation risk, to basic administrative convenience.
If my organization chooses to implement the deferral, do I provide employees with an election? Can I draw the line at less than $4,000?
You can but don’t have to. Section 2(a) of the Memorandum says that “[t]he deferral shall be made available with respect to [employees who are under the bi-weekly wage threshold],” but this command is directed at the Secretary and does not provide an employee with a particular right to receive the deferral, and does not tie an employer’s hands with how they choose to implement the deferral, if at all (see above with respect to the meaning of postponement). Thus it appears from the current IRS guidance that the employer has flexibility with respect to whether and how the employer chooses to implement the program. So an employer can apply the deferral to everyone eligible based on their pay, to no one, or, should it wish, to some combination of the two (subject to further guidance from the IRS and also generally applicable employment laws).
My organization is a public school in Connecticut, is there anything in particular I need to know?
Because teachers eligible for Connecticut Teachers’ Retirement System (TRS) benefits at retirement do not make contributions to the federal social security system, they are not eligible for the deferral, if it is implemented with respect to other employees.
If someone has been paid more than $137,700 before September 1, and now works a reduced work schedule that brings their pay to less than $4,000 in a given bi-weekly pay period after September 1, are they eligible for the deferral?
No. Since the definition of Applicable Wages references Code section 3121(a) wages, wages above the $137,700 social security compensation and benefit base are already not subject to social security tax (employer and employee portions) so such an employee’s post-September 1st pay is disregarded for purposes of the Notice and ineligible for the deferral.
How would my organization collect the deferred amount from employees? What if an employee separates from service before April 30, 2021?
The Notice requires that employers collect any deferred amount ratably from employees’ pay for the period January 1, 2021 through April 30, 2021, which means that employees will have less take-home pay than normal during this time (unless, of course, political conditions result in forgiveness of the deferred amounts by next year). For an employee that is not employed on the last day of the postponement period, or that terminates prior to January 1, 2021, the employer can attempt to withhold the remaining amount of deferred and unremitted payroll tax from the employee’s last paycheck. (Connecticut General Statutes section 31-71e, which authorizes the employer to withhold from an employee’s paycheck amounts required or allowed under state or federal law, would appear to support this approach.) The Notice provides, to this end, that “[i]f necessary, the [employer] may make arrangements to otherwise collect the total [deferred taxes] from the employee.”
Do I have to collect the deferred amount ratably from pay between January 1, 2021 and April 30, 2021? Could I accelerate the withholding and take the entire amount from the January 15, 2021 check?
The Notice requires ratable withholding unless it is “necessary” to make other arrangements. The scope of the word “necessary” is not exactly clear, but ratable withholding appears to be required unless special circumstances exist, such as a separation from service. In addition, as mentioned above, Connecticut General Statutes section 31-71e provides that an employer may not withhold or divert any portion of an employee’s wages unless the employer is required or empowered to do so by state or federal law, so employers choosing to implement the Notice must follow its directives in good faith.
For an organization that decides to move ahead with the deferral, how should it be implemented?
We would recommend that you first get in touch with your payroll service provider and your employment and tax attorneys with respect to implementing the deferral. Ultimately the decision to implement the relief provided in the Notice will be based on an assessment of whether providing employees with an advance in the amount of less than $2,000 is worth confronting the significant administrative complexities and headaches doing so might present.
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Many of the complexities of the Notice are unsettled and require an analysis of individual circumstances. The above should not be construed as legal or tax advice with respect to your particular situation.