The US Department of the Treasury and the Internal Revenue Service have issued guidance with respect to US President Donald Trump’s August 8, 2020 Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. The notice allows an employer to opt to postpone the withholding and depositing of certain employer-share Social Security taxes until repayment is required in 2021; it does not waive liability for the underlying taxes.
Notice 2020-65, released in IR-2020-195 on August 28, 2020 (the Notice), pertains to employers (referred to as Affected Taxpayers) that are required to withhold and deposit employee-share Social Security taxes and are affected by the coronavirus (COVID-19) pandemic. This LawFlash identifies key points in the Notice.
As a threshold matter, Notice 2020-65 authorizes deferral of the employee share of Social Security taxes at the employer’s option—not at the employee’s option. This is consistent with the regulations under the statutory grant of authority (Internal Revenue Code (IRC) Section 7508A) that allowed the Trump administration to authorize employee tax deferral during the COVID-19 pandemic. In particular, Treas. Reg. § 301.7508A-1(b)(2) instructs that when deadlines are delayed pursuant to Section 7508A, Affected Taxpayers are “eligible for postponement,” which indicates the voluntary nature of the relief program.
Employers that properly withhold and deposit with the IRS the employee share of Social Security taxes that are otherwise eligible for deferral should be statutorily protected from any liability to third parties, including employees: “Every employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer.” The prevailing view in the courts is that IRC Section 3102(b) prohibits a private cause of action under FICA by employees against their employer.
Per the Notice, taxable wages (i.e., Social Security wages under the $137,700 annual wage cap) paid between September 1, 2020 and December 31, 2020 are eligible for deferral to the extent that an employee’s Social Security wages (pre-tax) do not exceed $4,000 paid for a biweekly pay period. Whether an employee’s wage level is below (deferrable) or above (not deferrable) the threshold amount is to be determined on a pay period–by–pay period basis, “irrespective of the amount of wages or compensation paid to the employee for other pay periods” and with some flexibility allowed in determining pay period length.
The value of benefits that are not subject to Social Security tax amounts—like qualified health savings account contributions, dependent care assistance contributions, and others—are excluded from the periodic qualifying wages threshold. The Notice does not address whether and how supplemental wages like bonuses, equity compensation, and other single-day payroll events qualify for deferral. This ambiguity adds complexity to updating payroll systems to accommodate this tax deferral, discussed further below.
The Notice further instructs that employers that defer employee taxes between September 1, 2020 and December 31, 2020 must withhold the deferred amounts from affected employee wages “ratably” between January 1, 2021 and April 30, 2021. All deferred amounts must be repaid by May 1, 2021 to avoid interest and penalties.
Employers most certainly should not withhold employee-share taxes but then wait to deposit them with the IRS in case Congress waives liability. Once withheld, sole liability for any deferred and unpaid tax rests with the employer, and no longer with the employee. Withholding followed by a failure to deposit could trigger a 10% IRC Section 6656 failure to deposit penalty, plus the 20% IRC Section 6662 penalty, unless waived by the IRS in additional guidance.
With respect to the payment of deferred taxes, the Notice states both that “[a]n Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice . . . or interest, penalties, and additions to tax will begin to accrue,” and that, “[i]f necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.” Thus, the Notice generally tracks the IRC and regulations in imposing joint and several liability on employees and employers for employee-share taxes.
Employers have a statutory obligation to withhold and deposit with the IRS employee-share payroll taxes under IRC Section 3102(a)-(b). Employees also remain liable for any deferred and unpaid tax.
However, the Notice fails to reference several significant consequences if an employer is left to repay deferred employee-share taxes without collecting those taxes from an affected employee. Such consequences include the following:
The benefit to employees of employers that choose to participate in the deferral is, at most, an interest-free loan with a term shorter than four months (since employers that decide to participate will need time to update withholding, deposit, and payroll reporting systems). Assuming interest rates remain historically low between September 1, 2020 and April 30, 2021, the time value to employees of deferral for approximately four months is likely under 0.1% (based on the three-month Treasury bill rate, which was 0.09% in July 2020, and falling) times the deferred tax amount. This equates to negligible interest savings to employees.
In exchange, affected employees will be required to repay the deferred taxes during each biweekly pay period in each of the first four months of 2021, together with employee-share Social Security tax attributable to the current pay period during 2021 (plus federal and state income tax withholding). These obligations could squeeze employee wages or compensation in the beginning of 2021 and/or consume bonuses paid early next year.
Employers that opt to participate will likely incur significant costs associated with the following:
Regardless of an employer’s decision to participate in the employee tax deferral program, clear messaging to employees is important. Employers that opt to participate should inform employees of the consequences that deferral carries, so that employees can make informed decisions about whether to defer their taxes.
Employers that opt not to participate should provide the reasons supporting this decision, including the key downside to employees—namely, repayment in 2021—since there is little likelihood that Congress will act to forgive deferred taxes.
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 Employee federal income tax withholding, the employee share of Medicare taxes, any additional Medicare taxes, state taxes, or any employer-share payroll taxes are not affected.
 During a September 3, 2020 monthly payroll tax conference call, a spokesperson for the IRS also confirmed that the program is voluntary. This is consistent with the IRS news release for Notice 2020-65 (IR-2020-195, Aug. 28, 2020), as well as earlier statements by the Treasury secretary and others. See, e.g., Roger Russell, “IRS gives some answers to payroll deferral questions,” Accounting Today (Sept. 10, 2020).
 IRC § 3102(b); Treas. Reg. § 31.3102-1(d).
 Employee tax deferral also applies to the 6.2% RRTA employee share of Social Security tax equivalent on the first $137,700 of compensation imposed under IRC § 3201(a) applicable to railroad employees. For simplicity, the term “wages” as used throughout this LawFlash denotes Social Security “wages” as defined by IRC Section 3121(a) and RRTA “compensation” as defined by IRC Section 3231(e), despite the technical differences in those terms’ statutory definitions.
 Equivalent wage thresholds apply to other pay periods, e.g., $2,000 weekly or $8,000 monthly.
 See Treas. Reg. § 31.3102-1(d) (“Until collected from him the employee also is liable for the employee tax with respect to all the wages received by him.”).
 Treas. Reg. § 31.3102-1(a), and Treas. Reg. § 31.3102-1(d) (second and third sentences) (“The employer is liable for the employee tax with respect to all wages paid by him to each of his employees whether or not it is collected from the employee. If, for example, the employer deducts less than the correct amount of tax, or if he fails to deduct any part of the tax, he is nevertheless liable for the correct amount of the tax.”).
 See Treas. Reg. § 31.3102-1(d) (fourth sentence).
 See Treas. Reg. § 31.6205-1(d)(1).
 Multiple third-party payroll service providers have acknowledged in the media that implementation of the employee tax deferral program within such a small window of time will require substantial resources.