Since August 8, 2020, employers have struggled with questions on how to implement President Trump's executive order (the Executive Order) directing the Secretary of the Treasury to allow the deferral of withholding and deposit of certain payroll taxes from September 1 to December 31, 2020. Last week, the Department of Treasury issued Notice 2020-65 to provide guidance on this issue. Despite the guidance, employers may find that they are faced with the same practical questions on whether and how to implement this payroll tax deferral.
Consistent with the Executive Order, Notice 2020-65 provides that the due date for employers to withhold and deposit an employee's share of the Social Security portion taxes (and the comparable amount arising under the Railroad Retirement Tax Act) is postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. The postponement applies to wages or compensation paid between September 1 and December 31, 2020, but applies only to compensation that is less than $4,000 as determined on a bi-weekly basis.
While the Notice provides for a postponement of the payroll taxes described above, it notes that such amounts must ultimately be paid between January 1 and April 30, 2021, or an employer could be subject to interest, penalties, and other amounts for such unpaid taxes. In other words, the Notice authorizes a temporary deferral of such taxes, but those taxes must eventually be paid in early 2021 (unless there is future legislation from Congress).
The guidance issued in Notice 2020-65 does not resolve many of the practical questions that employers face if they implement the payroll tax deferral set out in the Executive Order. Employers that do not withhold payroll taxes from their employees' paychecks in the final months of 2020 will ultimately need to collect and pay such amounts in early 2021. Employers may find that they cannot recover such amounts from employees who terminate employment prior to 2021. For employees who remain employed into 2021, the double withholding of employee-share Social Security tax until the 2020 deferral is repaid may create a financial hardship
Such practical difficulties may pose substantial hurdles for employers that seek to provide this temporary relief to their employees.
If you have any questions about whether or how to implement this payroll tax deferral for your business, please contact the authors or any member of the Venable Employee Benefits and Executive Compensation Group.