On August 8, 2020, the President issued a memorandum directing the IRS to use its authority under IRC section 7508A to defer the withholding, deposit, and payment of the employee’s share of Social Security taxes (the 6.2% FICA tax that is withheld from employee wages). The IRS recently issued guidance stating that employers who are required to withhold and pay the employee’s share of Social Security tax or the Railroad Retirement tax equivalent are affected by the COVID-19 emergency for purposes of this relief (Affected Taxpayers). Under this relief provision, the due date for the withholding and payment of the tax imposed by IRC section 3101(a) and the equivalent amount imposed under IRC section 3201 on Applicable Wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021.
Applicable Wages means wages paid to employees during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages paid for a bi-weekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods. The determination of Applicable Wages is made on a pay period-by-pay period basis. If the amount of wages is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided for under Notice 2020-65 applies to those wages, irrespective of the amount of wages paid to the employee for other pay periods.
An Affected Taxpayer must withhold and pay the total taxes that are deferred under Notice 2020-65 from wages paid between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes. If necessary, the employer may make arrangements to otherwise collect the total taxes from the employee.
Of particular interest to tax professionals who must provide guidance and advice to their payroll tax clients is what is not included in Notice 2020-65:
1) The notice does not provide any elections for employees. The relief provision applies to the employer, not the employee. The notice identifies the employer as the Affected Taxpayer. There is no option for the employee to make an election to have the taxes continue to be withheld, and does not require the employee to make an affirmative election to have the withholding of taxes deferred. Employees who have their take home pay temporarily increased by not having Social Security taxes withheld will experience a 12.4% drop in take home pay after January 1, 2021 when double the amount of Social Security taxes begins to be withheld.
2) The notice does not state whether or not the deferral of taxes is voluntary. It simply states that the withholding and payment deadline is deferred. IRC section 7508A allows the IRS to extend the filing and payment deadline for taxes due to a presidentially declared disaster, but does not require taxpayers to delay the filing and payment of their taxes. The law appears to allow employers to continue to withhold and pay the tax at the time the wages are paid. In fact, the IRS notice specifically states: “If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.” An employer may decide it is too big a risk not to withhold the tax and that it is necessary to continue to withhold the taxes from employee wages to insure that the funds will be available to pay the tax when payment is due.
3) The notice does not address the related employer rules.
4) The notice does not address how the deferral of withholding and payment of taxes will be reported on Form 941, Employer’s Quarterly Federal Tax Return.
5) The notice does not address a situation where the employee separates from service prior to the employer’s ability to withhold the taxes from employee wages. A footnote in the IRS notice says the deposit obligation for employee Social Security tax does not arise until the tax is withheld. Accordingly, by postponing the time for withholding the tax, the deposit obligation is delayed. However, Regulation section 31.3102-1(a) says the employer must collect the tax from the employee in some way, even if the wages are paid in something other than money, and pay over the tax to the government. The guidance does not provide any liability relief for employers who are unable to eventually collect the tax from employees who quit prior to January 1, 2021.
6) The notice does not address a situation where the employer decides to not defer the withholding and payment of the employee’s share of Social Security tax, and then Congress later decides to forgive the tax liability. There will likely be political pressure on Congress to enact payroll tax forgiveness to avoid a decline in employee take home pay after January 1, 2021. By not taking advantage of the relief provided for in the notice, employees could eventually lose out on tax forgiveness.
7) The notice does not explain how the relief benefits the employer, even though the relief applies to the employer. By not withholding the tax, the employee’s take home pay is increased. Thus, the employer’s net payroll cost savings is zero. The relief is clearly for the employee, even though it is the employer who decides whether or not to take advantage of the relief. The employer’s relief appears to be limited to making the employee happy due to an increase in take home pay, which could be an incentive for the employer to take advantage of the relief.