Treasury issues guidance on payroll tax holiday

The Treasury Department released guidance the evening of Friday, Aug. 28, 2020, on the “payroll tax holiday” provided by the Aug. 8, 2020, presidential memorandum. Notice 2020-65 requires the deferred taxes to be repaid ratably over the first four months of 2021, but provides virtually no answers to the many questions employers have been asking about the related compliance and other issues. Most importantly, it appears to leave employers responsible for collecting the taxes from employees in 2021 and implies they must recoup deferred liabilities from those employees who have departed prior to or during the collection period. Unfortunately, the notice offers no direction as to how this should be done.

Under the notice, the date by which employers must withhold and pay Social Security taxes for workers earning less than $4,000 per biweekly pay period is postponed. An equivalent threshold applies with respect to other pay periods; for example, employees receiving weekly paychecks would instead use a $2,000 threshold. Further, the determination of whether an employee is eligible is made on a pay-period-by-pay-period basis. In other words, if an employee earns $3,500 in a given pay period, the Social Security tax otherwise due on those wages could be deferred, despite the fact that same employee earned $5,000 in the previous pay period.

Payroll taxes that otherwise must be withheld and remitted to the government between Sept. 1, 2020, and Dec. 31, 2020, are now due between Jan. 1, 2021, and April 30, 2021. Interest, penalties or additions to tax will accrue on any unpaid amounts starting May 1, 2021.

Key considerations:

• While the notice says the collection date is postponed, it does not appear to make the deferral mandatory. Accordingly, it seems employers can decide to continue collecting and remitting payroll taxes in the normal course of business. This would be consistent with Treasury Secretary Steven Mnuchin’s previous informal remarks.
• It is apparently up to the employer to determine how soon to collect the deferred payroll taxes in 2021 so long as they are collected and remitted by April 30, 2021. While the IRS notice states that employers must withhold the deferred taxes from wages and compensation paid from January to April 2021, it adds that employers, “if necessary, “may make arrangements to otherwise collect” the taxes from employees. Presumably, this provision makes the employer responsible to come up with a method to recoup deferred taxes from any departing employees. Since there is no guarantee the employee’s share of deferred taxes will be forgiven, employers may not want that responsibility.