The payroll tax deferral

On August 28, 2020 the Treasury Department and the Internal Revenue Service released guidance on the payroll tax deferral that was ordered by President Donald Trump in a presidential memorandum on August 8th.

The guidance (Notice 2020-65) allows employers to postpone withholding and paying employee’s portion of the Social Security payroll tax (6.2%) if the pretax wages or compensation during any bi-weekly pay period generally are less than $4,000, or the equivalent amount with respect to other pay cycles.  

The Notice does not directly state whether the tax deferral is optional for employers.  However, based on the authority on which the guidance relies, it appears that employers can choose whether to implement the deferral because Section 7508A of the Internal Revenue Code and the press release uses permissive language such as “allowing” the deferral.  Currently, it is a postponement of tax not a forgivable tax for the employee.  

The deferral applies to wages or compensation paid from September 1, 2020, through December 31, 2020.

The Notice requires affected employers to withhold and pay the deferred taxes ratably between January 1, 2021, and April 30, 2021.  Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement.  Employers will likely want to structure “arrangements to otherwise collect” the deferred taxes by collecting them from a final paycheck or by a separate check from the employee.

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