On August 28, 2020, the IRS issued Notice 2020-65
, which was intended to provide guidance to employers on how to implement President Donald Trump’s August 8, 2020 memorandum
directing the U.S. Treasury Department to defer the withholding, deposit, and payment of certain employment taxes. The President’s memorandum created concerns for employers, because it only provided for the deferral of the taxes at issue and left open the possibility that employers might ultimately be required to pay the deferred taxes from their own funds. While the new notice provides some clarification regarding which employees are eligible for the deferral and when the deferred taxes must ultimately be paid, it provides no protection from the risk that employers will have to pay the deferred taxes from their own funds.
The scope of the President’s memorandum is narrow. It defers the collection of the employee’s share of Social Security taxes (imposed at a rate of 6.2%) and an equivalent amount of an employee’s Railroad Retirement taxes, in each case for wages paid from September 1, 2020 through December 31, 2020, and only for employees whose wages (or compensation) payable during any bi-weekly pay period generally is less than $4,000. The memorandum does not apply to income taxes, the employee’s 1.45% Medicare tax (or the Railroad Retirement Tax Act equivalent), or the employer’s share of Social Security or Medicare taxes. Shortly after the memorandum was issued, and during the course of an August 12, 2020 television interview on FOX Business, Treasury Secretary Mnuchin made a remark that indicated that compliance with the memorandum would be optional for employers.
The President’s memorandum left open a number of questions, including how the $4,000 bi-weekly limit was to be implemented, who would ultimately be responsible for payment of the deferred taxes, and when the deferred taxes would have to be paid. Notice 2020-65 appears to answer these particular questions, at least in part, but it does not address some key concerns of employers.
In regards to the $4,000 bi-weekly limit, Notice 2020-65 clarifies that the limit is to be applied pay period-by-pay period, and “irrespective of the amount of wages or compensation paid to the employee for other pay periods.” Thus, if between September 1, 2020 and December 31, 2020 an employee is paid less than $4,000 for a particular bi-weekly pay period, deferral of the employee’s Social Security taxes is permitted for that period, even if the employee is paid more than $4,000 for another bi-weekly pay period (for which deferral would not be available under the President’s memorandum). Under the literal language of the notice, an employee who generally makes less than $4,000 per bi-weekly pay period, but who receives a large bonus at the end of the year, might be eligible for the deferral of his or her share of Social Security taxes for at least some pay periods.
Notice 2020-65 does not discuss how to treat employees with more than one employer. While the notice states that the $4,000 limit is to be applied pay period-by-pay period, it does not say that the $4,000 limit is to be applied employer-by-employer. It therefore remains unclear how to apply the $4,000 limit to an employee who has more than one employer.
Perhaps the most significant concern under the President’s memorandum was who would ultimately be responsible for payment of the deferred taxes. Under current law, employers are liable for Social Security taxes that are not collected from employees. It had been hoped by many that IRS guidance would shift responsibility for the payment of deferred employee Social Security taxes to employees. Notice 2020-65, however, does not change the general rule. Under the notice, employers remain responsible for payment of deferred employee Social Security taxes.
Notice 2020-65 addresses the need to ultimately pay the deferred employee Social Security taxes by requiring employers to withhold and pay deferred employee Social Security taxes “ratably from wages and compensation paid between January 1, 2021 and April 30, 2021.” Interest and penalties on unpaid taxes will begin to accrue on May 1, 2021. The notice is silent as to what an employer should do if the employee is paid less between January 1, 2021 and April 30, 2021 than between September 1, 2020 and December 31, 2020, or if the employee ceases to be employed by the employer prior to April 30, 2021. An employer that defers the collection and payment of taxes under the notice and the President’s memorandum, therefore, appears to run the risk of having to pay some or all of the deferred taxes from its own funds. Moreover, because such taxes should be credited to employees, deferred taxes paid from an employer’s own pocket could represent additional income to the employee and, in theory, could be subject to tax withholding.
Even if the employee remains employed by the employer through April 30, 2021 at a rate of pay at least as high as the employee’s rate of pay from September 1, 2020 through December 31, 2020, it is not 100% clear that the employer may actually increase the rate of withholding as directed by the notice. For an employee who remains employed by the employer at the same rate of pay from September 1, 2020 through April 30, 2021, Notice 2020-65 arguably increases the withholding rate for employee Social Security taxes from 6.2% to 12.4% for the first four months of 2021 - something that the executive branch cannot do by itself. It is, therefore, conceivable that some employees will challenge the ability of employers to increase the rate of employee Social Security tax withholding during the first four months of 2021.
Other questions that remain unanswered include whether the President had the authority to issue the memorandum and whether the relief offered by the memorandum and Notice 2020-65 would be respected if there were to be a change in administration. It is, therefore, not entirely clear that employers may rely on the memorandum and the notice for protection from penalties and interest, even if they are willing to bear the risk of paying the deferred taxes from their own funds.
Kelley Drye is monitoring developments related to the President’s memorandum and Notice 2020-65 and may issue updates to this client advisory as more information becomes available.