On August 28, 2020, the Department of Treasury and Internal Revenue Service issued Notice 2020-65 implementing the Presidential Memorandum dated August 8, 2020. In the memorandum President Trump directed Secretary of the Treasury, Steven Mnuchin, to use his authority to defer certain employee payroll tax obligations in light of the ongoing COVID-19 pandemic, subject to the following conditions:
(a) The deferral shall be made available with respect to any employee the amount of whose wages or compensation, as applicable, payable during any bi-weekly pay period generally is less than $4,000, calculated on a pre-tax basis, or the equivalent amount with respect to other pay periods.
(b) Amounts deferred pursuant to the implementation of this memorandum shall be deferred without any penalties, interest, additional amount, or addition to the tax.
In response to the President’s memorandum, Notice 2020-65 provides the following guidance:
• Employers are allowed to defer withholding and payment of an employee’s Social Security tax on wages or the Railroad Retirement tax equivalent during the period September 1, 2020 through December 31, 2020.
• The deferral is available for any payment to an employee that has taxable wages below $4,000 for a bi-weekly pay period. Because the wages of some employees vary, the determination for the deferral is to be made on a pay period-by-pay period basis.
• Employers must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021, otherwise, on May 1, 2021, interest and penalties will begin to accrue on any unpaid amount. If necessary, the employer may make arrangements to otherwise collect the applicable taxes from the employee.
Notice 2020-65 is limited in its guidance and leaves many unanswered questions. For example:
• If the employer elects to defer, is it possible for the employee to opt out?
• What happens if an employee leaves and the employer is unable to collect the deferred taxes? Will the employer be liable for the tax or be subject to penalties for failure to withhold?
• In his memorandum, President Trump directs the Secretary of the Treasury to explore avenues (including legislation) to eliminate the obligation to pay back the taxes deferred. In the event the deferred taxes are forgiven, what options (if any) will be available to the employees of an employer that elected not to defer taxes?
We will keep you informed of any additional information as it becomes available.