Several weeks ago President Trump signed an Executive Order permitting the deferral of the employee portion of certain payroll taxes for certain employees for pay dates occurring on and after September 1, 2020, through December 31, 2020. It is likely that this Executive Order was issued as a means of increasing cash flow for those Americans who saw their enhanced federal unemployment benefit come to an end. Since its issuance, there have been many questions about how to implement the deferral, and the IRS, on August 28, 2020, finally issued Notice 2020-65 providing guidance on this relief provision.
Under the guidance, employers can defer the withholding, deposit, and payment of the employee portion of the Old Age Survivors and Disability Insurance (“OASDI”) taxes on Applicable Wages that are paid between September 1, 2020, and December 31, 2020. For this purpose, the term Applicable Wages means any pre-tax wage or compensation payment to any employee provided such wage or compensation payment is less than $4,000 on a biweekly basis. Applicable Wages are determined on a pay period-by-pay period basis, thus, if payment to an employee for a particular biweekly period is less than the $4,000 threshold amount, it would qualify for the deferral regardless of the amount that is paid during other pay periods.
It is important to point out that the Executive Order and the guidance under Notice 2020-65 both provide that this is a deferral provision, not a forgiveness provision. Further, neither the Executive Order nor Notice 2020-65 require employers to defer the withholding and payment of the employee portion of OASDI taxes. However, if an employer does elect to defer the withholding and payment of the employee portion of OASDI taxes, those deferred taxes must be withheld ratably from the employees’ wage and compensation payments paid between January 1, 2021, and April 30, 2021.
Employees will need to be made aware that the withholding of the deferred OASDI tax will be in addition to the regular tax withholding that would already be required on those wage payments for the first four months of 2021, thus their net take-home pay will be reduced. If the employer does not withhold and remit the deferred OASDI by April 30, 2021, as required, they will be subject to interest and penalties which will begin to accrue on May 1, 2021.
While the guidance in Notice 2020-65 did answer some questions, it did not provide guidance nor relief to employers in circumstances where they cannot withhold and pay the deferred OASDI taxes. As an example, what are employers to do if an employee no longer works for the business during the first four months of 2021 due to termination or other situations? Additionally, what should an employer do if an employee does not have sufficient wages to cover the deferred OASDI tax in 2021? Notice 2020-65 does not provide any relief to employers in this situation and thus, as it stands right now, it is more likely than not that the employer would be responsible to pay those taxes or be subject to penalties. The only guidance provided in Notice 2020-65 is that if necessary, the employer “may make arrangements to otherwise collect” the deferred OASDI taxes from the employee.
While the goal of this Executive Order is to help to increase cash flow to those who need additional help during this global pandemic, employers should analyze the practical, as well as potential legal concerns prior to implementing this order. It may be that the best course of action is to continue to withhold and remit employee OASDI taxes as you normally would. Contact your WG advisor if you have any questions.