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:
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.
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.
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.