Legal Alert

Treasury Issues Guidance Implementing Memorandum on Social Security Tax Deferral

by the Tax Group
August 31, 2020

Late in the afternoon on Friday, August 28, Treasury issued Notice 2020-65 providing guidance implementing President Trump’s Executive Memorandum on social security payroll tax deferral (Payroll Tax Deferral). President Trump’s Executive Memorandum deferred the employee portion of FICA tax (the 6.2 percent social security tax). The Notice merely extends the due date for an employer’s obligation to withhold and pay over the 6.2 percent employee portion of the social security tax for pay periods beginning on September 1, 2020, and ending on December 31, 2020. Employers are not required to defer withholding or deposit of social security tax; the Notice provides only that no interest and penalties will be imposed if the employer does not deposit the tax.

The Notice is silent as to whether an employee has the choice to participate. It would seem that if an employer chooses not to participate in the Payroll Tax Deferral, an employee cannot defer the tax or force an employer to do so. But it may be that, if an employer chooses to participate in the Payroll Tax Deferral, an employee could request that the employer continue to withhold the tax from his or her wages to avoid a later repayment obligation.

Payroll Tax Deferral is available only for the employee portion of social security taxes on wages paid to an employee who is paid less than $4,000 for a biweekly period or the equivalent amount for other pay periods (Applicable Wages). The determination of whether wages are Applicable Wages is made on a pay period-by-pay period basis. Therefore, it is possible that an employee’s wages may be eligible for the Payroll Tax Deferral during some pay periods but not others if such employee’s pay fluctuates. Only wages that are treated as wages for social security tax purposes are included to determine if wages paid to an employee are Applicable Wages. For example, employer contributions to qualified retirement plans are not subject to FICA taxes when such contributions would not be included when calculating an employee’s wages. 

The deferred taxes must be “repaid” because they are only deferred, not forgiven. Under existing tax law, an employer is liable for payroll taxes, including the employee portion of social security taxes, even if it is not withheld from an employee. Nothing in the Treasury guidance or the Presidential Memorandum changes that principle. 

The Notice explains that an employer must repay the deferred tax by withholding extra social security taxes ratably from wages paid to employees whose social security tax was deferred between January 1, 2021, and April 30, 2021 (resulting in lower employee net pay during that period). If an employer fails to “repay” the deferred taxes, interest and penalties will be imposed on the employer with respect to the unpaid or underpaid amount beginning May 1, 2021.

When it comes to the collection of deferred tax in 2021, the Payroll Tax Deferral program leaves unanswered—or offers few satisfactory answers—to many questions arising under state wage laws, including whether state law even allows deduction from future earnings of deferred taxes. Many states have wage payment and collection laws that may restrict or limit the ability of an employer to deduct from an employee’s wages. Some of these laws allow deductions, but limit deductions that would reduce earnings below the applicable minimum wage. Further, in recent years, some states and local jurisdictions have enacted wage theft statutes, often imposing significant employer penalties (even criminal sanctions) for failure to pay employees their wages. 

The interplay of the Payroll Tax Deferral program and these state and local laws may pose significant hurdles for employers contemplating whether to participate. 

  • What if state law prohibits the employer from recouping deferred tax through a wage deduction? 
  • If employee consent is needed, what if the employee refuses to consent or revokes a previously given consent? 
  • What if the employee has left the employer’s employment with deferred tax uncollected, in whole or in part? 
  • What if the employee resigns before January 1, 2021, such that the recoupment period has not yet started? 
  • May an employer deduct the uncollected portion from the final pay and/or from accrued paid time off to be paid out? 
  • What if the employee is on unpaid leave, such as FMLA, during the recoupment period, such that there are no wages from which to deduct the deferred taxes? 

The Treasury guidance does not address these issues. Nor is it clear whether the Presidential Memorandum and the guidance preempt or supersede state and local laws. Employers will need to evaluate applicable legal restrictions under state and local law to determine if they will be able to deduct deferred taxes during the recoupment period or risk being held accountable for the uncollected deferred taxes. 

A much-discussed issue preceding the Notice was the consequences of an employee no longer working for the employer that deferred the taxes. Commentators speculated that the employee would have to “repay” such taxes when he or she files his or her 2020 IRS Form 1040. However, that is not the approach adopted by the Notice. Instead, the Notice provides that the employer “may make arrangements to otherwise collect the total deferred taxes from the employee.” For many employers, this offers little practical guidance, as they may be left with no option but to commence a collection action against a former employee who refuses to cooperate with collection of the deferred taxes. Absent collection, it appears the employer will be liable for the deferred taxes.  

If you have any questions about this guidance, please contact Wendi Kotzen, Chris Jones, Shannon Farmer or Brian Pedrow.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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