Key Considerations for the Trump Executive Memorandum Payroll Tax Deferral

The IRS published on August 28, 2020 Notice 2020-65, to provide guidance on the deferral of employee payroll tax obligations. This Notice was issued in response to the President’s August 8th Executive Memorandum which was intended to assist in providing financial relief through the deferral of payroll taxes for those experiencing hardship due to the COVID-19 pandemic. Key considerations follow:

How Is Eligibility For Deferral Determined?

The deferral is only available to employees who have wages and compensation of less than $4,000 in a given bi-weekly payroll period ranging from September 1st-December 31st or an equivalent threshold amount for other payroll periods. This determination is made pay period by pay period. Wages and compensation are defined as equal to Form W-2, Box 3 (i.e. wages subject to FICA taxes, which includes elective deferrals to 401(k) plans.)

What Payroll Taxes Can Be Deferred?

Employers have the option to defer the employee portion of the Old Age, Survivors and Disability Insurance Segment of FICA taxes (i.e. the 6.2% tax on employee wages). There is no deferral of the 1.45% Medicare taxes. The period of deferral is applicable to taxes on wages paid from September 1, 2020 through December 1, 2020. Note that the payroll taxes are deferred and not forgiven as the taxes must be paid back in 2021.

Are Employers Required to Defer Withholding Employee Payroll Taxes?

The Notice does not specifically address this question. The Notice does not apply to employees, just employers and employers are defined as the “Affected Taxpayer”, who is ultimately responsible for ensuring the deferred tax is paid when due in 2021. But based on the authority on which the Notice is based upon (7508A of the Internal Revenue Code), it appears that employers do in fact have the option to choose whether to implement the deferral as the Notice uses permissive terms such as “allowing deferral” and “available to employers”. This is the interpretation most widely held.

If an Employer Elects to Defer the Payroll Taxes, How Are The Deferred Taxes Paid?

Employers who defer payroll taxes from September 1, 2020 through December 1, 2020 must pay them from January 1, 2021 through April 30, 2021 on a ratable basis. If necessary, employers can make alternative arrangements to collect the deferred taxes from their employees. If deferred payroll taxes are not repaid by April 30th, interest, penalties, and additions to tax will begin to accrue May 1st
of 2021.

Summary

There has been no guidance issued from the IRS to indicate it is mandatory for employers to participate in the tax deferral program. As such, anecdotally, we know many nonprofits have already indicated that they will ‘opt out’ of participating in this program. Their primary concern is the challenge of a heavier than normal tax burden on their employees at the beginning of 2021. We recommend that you evaluate your own individual organization’s/employees’ situation to determine the best course of action. Circumstances of participation in this program may evolve, should subsequent federal legislative action provide full guaranteed forgiveness. We will continue to monitor the situation and provide updates should they become available.