Late Friday, the IRS issued Notice 2020-65 entitled Relief with Respect to Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic. This Notice provides guidance to employers on how to implement the President’s Memorandum to defer the withholding, deposit and payment of employee Social Security taxes for the period 9/1-12/31/2020.
The Notice defines applicable wages as wages with pay dates beginning September 1, 2020 and ending December 31, 2020 but only if the amount paid during a bi-weekly pay period is less than $4,000. Once an employee exceeds this threshold amount, no amount of income is eligible for the tax deferral. The determination of applicable wages is made on a pay period by pay period basis but equates to an annual salary of $104,000
In addition to defining applicable wages, the Notice explains that employers are to withhold the deferred 2020 tax ratably from wages paid between 1/1-4/30/2021. If necessary, the employer may make other arrangements to collect the applicable taxes from the employee.
This last sentence implies that the employer is on the hook for the deferred taxes if they are unable to collect them through withholding. This would be the case for a terminated employee.
Nothing in the Notice seems to permit an employer to opt out of the President’s Memorandum. However, Treasury Secretary Mnuchin did indicate he considered compliance to be optional, meaning an employer could continue to withhold the Social Security tax normally.
In the same vein, since the employer is on the hook for these un-withheld taxes, there does not appear to be any mechanism for an employee to force the employer to defer withholding. The employer would just opt out of the deferral program – with notice to employees who may have been expecting an increase in their paycheck.
The Notice also does not address the ultimate forgiveness of these taxes. The President made this promise if he was re-elected. However, it takes an Act of Congress to forgive this tax. The current Congress has indicated it is not in favor of a payroll tax holiday like this. This Congress will still be in session when it comes time for action on forgiveness. The new Congress will not be installed until early January.
Should forgiveness come to pass, what happens to those employees whose employers opted out of the deferment? Will only deferred taxes be forgiven? Unfortunately, we do not know.
If you have any questions please contact your DunlapSLK team member.