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President Orders Employee Payroll Tax Deferral

Update: August 31, 2020

New Guidance Implementing Employee Payroll Tax Deferral Provision

On August 28, 2020, the IRS issued Notice 2020-65 to provide guidance to employers on how to execute the President’s August 8th executive order, summarized in the article below. The IRS issued a press release accompanying the Notice.

The Notice allows employers to defer the withholding and payment of the employee portion (6.2%) of the Social Security payroll tax if an employee’s wages are below $4,000 on a pre-tax, bi-weekly basis, or the equivalent amount with respect to other pay cycles (e.g., $2,000 weekly, $4,333 bi-monthly; $8,666 monthly). No deferral is available for any payment of taxable wages of $4,000 or above for a bi-weekly pay period; thus, a separate determination is required for each pay period between September 1, 2020 and December 31, 2020. The deferral period starts September 1, 2020, meaning that it can apply to payments made on or after September 1, 2020.

Below are a few key points about the Notice:

  • Participation in the deferral program is optional. Employers can opt-in or decide not to participate. If an employer opts-in, it is unclear whether individual employees must be given the choice to opt-out. It seems like this electivity should be required because employees should not be forced to accept a loan they don’t want.
  • The due date of any deferred amounts is the 4-month period between January 1, 2021 and April 30, 2021. Given the ratable repayment provision described below, the deferral period for any deferred amount is only about 4 months.
  • If an employee earns the full $4,000 every two weeks, the deferred amount is $248 per pay period.
  • The deferred amount depends on the actual earnings per pay period, and will vary if the amount paid during the pay periods varies. This means that employers will need to make a separate determination for each employee, and then for each pay period of each employee.
  • No interest is imposed on the deferred amounts and the deferred amounts are required to be repaid ratably from wages paid between January 1, 2021 and April 30, 2021, and interest and penalties will accrue as of May 1, 2021 with respect to any unpaid amounts. This confirms that the deferral period for any deferred amounts is only about 4 months.
  • Employers may, “if necessary,” make arrangements to collect the deferred amounts from the employee, but no guidance is provided as to when or how this should be accomplished. This language suggests that Treasury and the IRS either expect the deferred amounts to be forgiven legislatively, or that employers will shoulder the burden of repaying the deferred amounts, though Treasury does not have legal authority to mandate employer responsibility.
  • Employers are subject to collection risk if an employee leaves the job before the deferred amount is repaid. If an employer ends up paying an employee’s deferred amount, either because it wants to provide additional benefit or because it cannot collect the amount from the employee, then the payment would likely be considered additional compensation to the employee in 2021.

What Should Employers Do?

  1. Employers need to decide whether they are going to participate in the program, and if so, they should notify their employees of their right to request deferral and the method of doing so.
  2. Employers need to decide on their default position – do they default employees in or out of the program? If employees are defaulted into the program, employers also need to decide whether to allow individual employees to opt-out.
  3. Employers should set forth clear repayment terms if they want to be repaid, and these terms should be communicated to employees at the time they make the election to participate in the program. For example, employers could institute double withholding in 2021 until repayment is made. They should also consider requiring a lump sum repayment if an employee leaves the job before repayment is made. As currently structured, the program puts the employer on the hook for any unpaid taxes that are not repaid by May 1, 2021.
  4. Employers with collective bargaining agreements should consult with legal counsel because their ability to seek repayment may be limited.
  5. If an employer wants to participate, but not go through the gymnastics of adjusting its payroll systems and employment tax reporting for Q3/Q4 2020 and Q1/Q2 2021, then it can instead offer a loan (or a bonus) to employees with terms similar to those in the executive order. This would engender goodwill and allow for clear repayment terms.
If you have any questions regarding the Notice, please contact your Withum advisor or a member of Withum’s Tax Group.

Update: August 14, 2020

On Saturday, August 8, 2020, the President signed an executive order (EO) directing the Treasury Department to defer the withholding, deposit, and payment of certain employee payroll taxes for the period beginning September 1, 2020, and ending December 31, 2020.

The deferral relates only to the employee’s portion (6.2%) of Social Security payroll taxes (and certain railroad retirement taxes) for any employee who generally earns less than $4,000 on a pre-tax basis during any bi-weekly pay period, which equates to about $104,000 per year. No interest will be charged on any deferred amounts and no repayment date has been set. Thus, if an employee earns $104,000 per year, the deferral amount under this provision would be about $2,150 ($104,000 * 4/12 * 6.2%).

The EO applies to employees whose wages “generally” are less than $4,000 on a bi-weekly basis. This suggests that the $4,000 amount is not a hard ceiling and that certain one-time payments, like bonuses, will not affect eligibility, but we will have to wait and see how Treasury implements the provision.

The EO states that the deferral “shall be made available to any employee.” This suggests optionality and that eligible employees will be able to decide for themselves whether they want to take advantage of the provision. But nothing in the EO addresses how or when repayment would be required to be made. We know that Treasury has the authority to defer payments for up to a year during certain disasters, so presumably, the deferred amounts will be due no later than December 31, 2021.

If you have questions regarding this EO, please contact your Withum advisor or a member of Withum’s Tax Group.

There are many unanswered questions regarding the EO. How would employers recoup the deferred amounts through repayment or additional withholding? Presumably, the repayment would be spread over a period of time and effected through additional withholding. And what if the employee quits or is terminated during or after the deferral period? Would the employee repay the employer, or would the employee make its repayment directly to the IRS? What reporting mechanisms will be required of the employer and of the employee? These questions and others presumably will be addressed when the Treasury announces rules to implement the EO.

The EO also directs Treasury to explore avenues to eliminate the obligation to repay the deferred amounts, and this is consistent with statements the President has made since he signed the EO. He has made it clear that forgiveness is the ultimate goal, but that can only be achieved through legislation. And even if that were possible, it would lead to unfairness because only employees that elected to take advantage of the deferral would benefit from the forgiveness. It would also exclude self-employed individuals and partners because self-employment taxes are not eligible for deferral under the EO. These issues highlight the need for additional guidance.

Deferral under the EO is different from the employer payroll tax deferral that was enacted in section 2302 of the CARES Act. That deferral allows employers to defer the employer’s portion (6.2%) of the Social Security payroll tax (and certain railroad retirement taxes) on wages paid from March 27, 2020, through December 31, 2020. It applies to employers of all sizes and the amounts deferred must be repaid in equal installments by December 31, 2021, and by December 31, 2022.

What Should Employers Do?

For now, nothing. The deferral would not begin until September 1, 2020 and presumably Treasury will issue guidance before that time. Also, the EO is widely believed to have been an effort by the President to get Congress back to the negotiating table for the next round of stimulus legislation. If Congress reaches a deal on that front, then there is a chance this EO could be rescinded in favor of that legislation.

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