After 5:00pm EDT on Friday, August 28, 2020, the IRS and the Treasury Department released their initial guidance on the payroll tax holiday scheduled to begin on September 1, 2020 in Notice 2020-65.[1]

Basic Deferral Rule

As with earlier relief granted related to COVID-19, this delay in the withholding and payment of employee OASDI is provided under the provisions of IRC §7508A. Such relief only applies to “Affected Taxpayers” which for purposes of this notice is defined as follows:

Accordingly, the Secretary has determined that employers that are required to withhold and pay the employee share of social security tax under section 3102(a) or the railroad retirement tax equivalent under section 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the Presidential Memorandum and this notice (Affected Taxpayers).[2]:

Put more simply, the “Affected Taxpayer” will be the employer not the employee.

The Notice describes the relief in general terms as follows:

For Affected Taxpayers, the due date for the withholding and payment of the tax imposed by section 3101(a), and so much of the tax imposed by section 3201 as is attributable to the rate in effect under section 3101(a), on Applicable Wages, as defined herein, (collectively Applicable Taxes) is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021.[3]

Time to Deposit the Taxes

In a footnote, the Notice provides that it is the delay in the withholding that delays the time for the deposit of the taxes by the employer:

The deposit obligation for employee social security tax does not arise until the tax is withheld. Accordingly, by postponing the time for withholding the employee social security tax, the deposit obligation is delayed by operation of the regulations. Thus, this notice does not separately postpone the deposit obligation.[4]

Nothing in the notice appears to require the employer to cease withholding employee OASDI from an employee’s wages. But the above footnote would indicate that if an employer does withhold employee OASDI from an employee’s wages, the employer will need to deposit those taxes at the same time as the other taxes withheld at that time are required to be deposited.

Applicable Wages

Under the memorandum issued by the President, only those receiving the equivalent of a biweekly payroll of less than $4,000 are eligible to have withholding deferred. “Applicable Wages” is used in the Notice to refer to wages from which the OASDI employee withholdings are eligible for deferral. The Notice provides:

For purposes of this notice, Applicable Wages means wages as defined in section 3121(a) or compensation as defined in section 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.[5]

A footnote to the above section indicates that since the definition refers to compensation as defined in §3121(a) (FICA/Medicare wages) or §3231(e) (RRTA/Medicare wages), any items excluded from those wages will be excluded from Applicable Wages.[6] So, for instance, amounts removed from wages to pay for health care under a cafeteria plan will serve to reduce the amount of Applicable Wages, potentially allowing an employee who is just over the limit without a cafeteria plan deferral to qualify for a payroll tax deferral by making such a deferral to the cafeteria plan (assuming the plan allows for such a deferral to be elected at this point).

The guidance provides that the limitation applies on a pay period-by-pay period basis—thus, it is possible an employee with wages over $104,000 for the year could qualify for deferral in any bi-weekly pay period where his/her wages are below $4,000.[7]

If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered Applicable Wages for the pay period, and the relief provided in this notice applies to those wages or that compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.[8]

Eventual Payment of Deferred OASDI Taxes

The key question that had to be answered by the guidance was how the taxes would eventually be paid and by whom should Congress not act to forgive the balance due. Under the notice, the ultimate liability falls on the “Affected Taxpayer” which is defined as the employer, though the employer is directed to withhold the tax from the employees from whom withholding was deferred.

The Notice provides:

An Affected Taxpayer must withhold and pay the total Applicable Taxes that the Affected Taxpayer deferred under this notice ratably from wages and compensation paid between January 1, 2021 and April 30, 2021…[9]

If the employer fails to pay over those taxes during that period, the Notice provides that “interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid Applicable Taxes.”[10]

Of course, that assumes both that the employee will remain an employee during the period from January 1, 2021 to April 30, 2021 and that the employee’s paychecks will be large enough to absorb the additional withholding. If the employer is unable to recover the entire deferred balance through the ratable withholding the ruling provides the following:

If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee.[11]

Do I Have To Defer the Withholding? And Can I Force My Employer to Do This (or Not Do This)?

The Notice does not explicitly answer these questions. Presumably since nowhere does it require the employer to defer withholding, an employer could elect to just continue withholding OASDI for all of its employees.

It would appear that if an employer wanted to allow employees to make an election to defer or not defer the OASDI taxes, that is not explicitly prohibited. In fact, the Notice appears to give the employer full discretion to simply force all employees to defer, or decide that, for instance, only the shareholders will participate in any deferral.

As well, since it is the employer rather than the employee that is the Affected Taxpayer, it does not appear that an employee would be able to force his/her employer to defer withholding. If an employer is concerned about being forced to repay amounts deferred by employees who leave service (perhaps specifically to avoid having that extra FICA withholding), it appears the employer could simply refuse to participate in the deferral program.

What About Forgiveness?

Treasury does not address forgiveness, presumably because Congress will have to take action for such a forgiveness of the deferred amount to take place. There is no assurance that Congress will take such action, or even will care to try to pass such a forgiveness provision.

But there’s also a risk for employees who do not defer, or are not allowed to defer by their employer, that Congress might only address actually deferred amounts in a forgiveness bill—so any employees that do not have the OASDI deferred would not be able to obtain a refund of such taxes under a forgiveness program.

[1] Notice 2020-65, August 28, 2020 https://www.irs.gov/pub/irs-drop/n-20-65.pdf (retrieved August 28, 2020)

[2] Notice 2020-65, p. 1

[3] Notice 2020-65, p. 1

[4] Notice 2020-65, p. 1 Footnote 1

[5] Notice 2020-65, p. 2

[6] Notice 2020-65, p. 2 Footnote 3

[7] Notice 2020-65, p. 2

[8] Notice 2020-65, p. 2

[9] Notice 2020-65, pp. 2-3

[10] Notice 2020-65, p. 3

[11] Notice 2020-65, p. 4