On August 8, 2020, President Donald Trump issued an Executive Order and Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (Memorandum).
Pursuant to the Memorandum, the Secretary of Treasury is directed to use his authority to defer the withholding, deposit and payment of the employee portion (6.2%) of social security tax (or FICA) on wages or compensation paid between September 1, 2020, and December 31, 2020. The Memorandum also directs the Secretary of Treasury to issue additional guidance regarding the implementation of the deferral. Read Warner’s August 12, 2020, eAlert titled “Payroll Tax Obligations Deferred in Light of COVID-19.”
On August 28, 2020, the Secretary of Treasury issued Notice 2020-65 providing guidance regarding the Memorandum. The Notice refers to a “pay date” that occurs between September 1, 2020, and December 31, 2020, so this could apply for some employers for payroll paid on September 1.
The Notice clearly states that the obligation to withhold and remit is postponed, so this is only a deferral and not a tax holiday. The deferred tax will need to be withheld and remitted from wages and compensation paid by the employer between January 1, 2021, and April 30, 2021, on a prorata basis, otherwise interest, penalties and additions to tax will begin to accrue on May 1, 2021. The Notice clearly states that the payment of taxes arises upon an employer withholding of the tax.
This withholding deferral applies to employees with wages or compensation payable during a biweekly payroll period that are generally less than $4,000 for each employee, calculated on a pre-tax basis, or the equivalent amount during other payroll periods. Amounts deferred will be without penalties, interest, additional amounts or additions to tax. No further guidance was provided on this aspect of the Memorandum except if the wages for an employee are less than $4,000 for a particular biweekly payroll period (or the equivalent amount for other payroll periods) then the amount of the wages is the amount used to compute the deferred taxes, or in other words, an employer must not compute the amount of tax on the $4,000 and defer that amount when the wages are less than the $4,000.
It is unclear from the Notice whether the deferral under the Memorandum is mandatory or discretionary; however, the Notice does state that the period for withholding and paying is deferred, so from a legal standpoint, an employer does not have the obligation to withhold, and therefore withholding the tax without contemporaneous payment may create issues as it may be considered an improper withholding of wages and compensation. Furthermore, there could be employer and reasonable person (100% penalty) liability for withholding during the deferral period and using this amount for other expenses, and even a strategy to withhold and hold may bring scrutiny.
Many questions remain such as what happens to employees that are no longer employed by an employer or employees that are hired after the deferral period. The Notice does say that employers can develop other arrangements with employees to ensure collection of the tax against future compensation. Also, there could be differing interpretations on how to compute the timing of the payment of the deferred amount and what happens if there is not enough payroll to create the obligation during the repayment period to pay back the deferred amount.
The Notice did not indicate whether further guidance will be issued, but given the continuing questions regarding the Memorandum, we think additional guidance could be issued.
Employers should continue to monitor for guidance from the Secretary of Treasury and wait to review such guidance before implementing changes to their payroll withholding processes.
If you have any questions regarding the Executive Order and Memorandum, please contact Sean Cook, Philip Haywood, Jay Kennedy, William Lentine, Jeffrey Segal or any member of Warner’s Tax Law Practice Group.