The payroll tax holiday beginning date of September 1 is rapidly approaching but, as I write this on Friday, August 28, 2020 at just after 2:00 pm Mountain Standard Time[1] no guidance has been issued by the Treasury Department. The memorandum issued on August 8 directed the Treasury Department to issue such guidance which then would provide for the deferral of the employee portion of old age, survivors and disability insurance (OASDI), more commonly referred to as FICA.

Without such Treasury guidance, most observers concluded that there was no authority for employers to stop withholding the tax, especially in light of IRC §3201(a) which provides, in part, that the OASDI tax “shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid.” The memorandum itself notes that “[t]his memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations…” which strongly suggests that employers need to wait for Treasury guidance on exactly how it will interact with §3201(a), or face the potential of becoming liable for the tax not withheld.

But a bit of a furor developed as the National Finance Center (NFC) of the USDA which, surprisingly enough to many (including this author), processes much of the payroll for the federal government, originally announced in an August 21 letter that it would “eliminate the OASDI employee deductions for all employees whose gross social security wages that are less than $3999.99. We will continue to calculate and remit the employer portion of OASDI. With that being said, the elimination of the withholding will vary by employee by PP[2], based upon any changes in their gross social security wages.”[3] This would be effective for the first payroll paid after September 1, 2020.

That notification also provided, in the final paragraph, a note that the employee would be liable if Congress failed to act to forgive the amounts not collected:

The executive order refers to the fact that this is a deferral of the deductions, and Treasury should look to have legislation put in place so that employees do not have to pay back these deferred amounts. NFC will provide additional information as it becomes available.[4]

On August 28, Tax Notes Today Federal published both a copy of the letter and an article where various commentators were quoted about issues with the letter.[5]

The publication of the letter caused confusion among payroll departments and raised concern that employees may point to the letter and wonder why their employer isn’t following the same policy. Many employers are taking a wait and see attitude until Treasury clarifies the interaction of §3201(a) cited earlier with any deferral, as well as whether it will be the employee or the employer that is ultimately responsible for repaying the taxes if Congress does not act to forgive the balance due.

The NFC reversed course later in the afternoon on August 28, publishing a second notification.[6] The new guidance provides:

Upon receiving final guidance from OPM and Treasury, NFC may eliminate the OASDI employee deductions for employees whose gross social security wages that are less than $3999.99. We will continue to calculate and remit the employer portion of OASDI. With that being said, the elimination of the withholding will vary by employee by PP, based upon any changes in their gross social security wages.[7]

Now the NFC seems to be endorsing the “wait and see” approach that most other employers appear to be taking in dealing with the question of whether to withhold employee OASDI once September 1 arrives.

[1] That is not a typo—I’m in Phoenix and we are on standard time year round, not daylight saving time.

[2] Payroll period

[3] National Finance Center Customer Notification, “Deferral of the Old Age, Survivors and Disability Insurance (OASDI) Deductions,” Reference Number: NFC-1597683008, August 21, 2020 https://nfc.usda.gov/ClientServices/HR_Payroll/Customer_Notifications/2020/General/082120-OASDI.pdf (retrieved August 28, 2020), p.1

[4] National Finance Center Customer Notification, “Deferral of the Old Age, Survivors and Disability Insurance (OASDI) Deductions,” Reference Number: NFC-1597683008, August 21, 2020, p.2

[5] Johnathan Curry, “Payroll Tax Deferral for Federal Employees Prompts Criticism,” Tax Notes Today Federal, August 28, 2020, 2020 TNTF 167-1 https://www.taxnotes.com/tax-notes-today-federal/employment-taxes/payroll-tax-deferral-federal-employees-prompts-criticism/2020/08/28/2cwvv

[6] National Finance Center Customer Notification, “Update - Deferral of the Old Age, Survivors and Disability Insurance (OASDI) Deductions,” Reference Number: NFC-1597683008, August 28, 2020 https://www.nfc.usda.gov/ClientServices/HR_Payroll/Customer_Notifications/2020/General/082820-COVID_Update.pdf (retrieved August 28, 2020)

[7] National Finance Center Customer Notification, “Update - Deferral of the Old Age, Survivors and Disability Insurance (OASDI) Deductions,” Reference Number: NFC-1597683008, August 28, 2020, p. 1