Payroll Tax Deferral Guidance

On August 28th, the IRS issued Notice 2020-65 (the “Notice”) providing additional guidance on President Trump’s August 8th Executive Order on payroll tax deferral (the “Executive Order”, found here).  The Executive Order directed the Secretary of the Treasury to take steps to defer withholding of the employee’s share of Social Security taxes for the period beginning September 1, 2020 and ending December 31, 2020.  The Notice answered several questions left open by the Executive Order, including:

• Who Qualifies to Defer? Per the Notice, all employers are deemed affected by COVID-19 and therefore all employers qualify to defer taxes under the Executive Order with respect to qualifying employees.  An employee qualifies with respect to any bi-weekly pay period during which the employee earns under $4,000 (regardless of the employee’s earnings during other periods).

• When are Deferred Taxes Due? Absent “other arrangements” (see below), any taxes deferred September 1, 2020 through December 31, 2020 must be ratably withheld from wages paid January 1, 2021 through April 30, 2021.

• Who is Liable to Pay Deferred Taxes? The Notice provides that the employer (and not the employee) will ultimately be responsible for the payment of any deferred amounts when they become due in 2021. Although the Notice permits employers to collect deferred amounts through ratable additional withholding during the first four months of 2021, in certain situations (for example, if an employee were to quit prior to all deferred amounts being withheld during 2021) the employer would ultimately bear the cost of making up such excess deferred amounts.

The Notice left several notable questions unanswered, including:

• Is Deferral Mandatory? Neither the Executive Order nor the Notice directly addressed whether deferral under the Executive Order is mandatory for employers or employees. To date, the most notable indication on that question is that Treasury Secretary Mnuchin suggested deferral would be optional during a public interview shortly after the Executive Order was issued on August 8th.  Based on Secretary Mnuchin’s statement and the lack of direct guidance to the contrary in either the Executive Order or the Notice, Miller Johnson believes deferral is most likely voluntary.
• What are “Other Arrangements”? The Notice did not specify what “other arrangements” would be permitted to catch-up deferred taxes.  Presumably, this language was intended to acknowledge that certain situations would not facilitate ratable withholding of deferred taxes during 2021.  For example, if an employee quits or is terminated prior to all deferred amounts being withheld, an employer could use an “other arrangement” to collect any remaining deferred amounts (for example, by withholding all remaining deferred amounts from an employee’s final paycheck).  Given the Notice’s lack of clarity on this point, Miller Johnson would recommend documenting any “other arrangements” in writing with an employee’s signature prior to deferring any withholding under the Executive Order.