Background and Four Prior COVID-19 Executive Actions

After reaching a stalemate with congressional Democrats on Capitol Hill, the President on Aug. 8 signed four presidential actions, including a memorandum for the Secretary of the Treasury regarding “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster.” The other three relief orders (i) ask the Secretary of Education to waive student loan payments and interest on Department of Education loans through Dec. 31, 2020; (ii) ask the Secretary of Health and Human Services and the director of the Centers for Disease Control and Prevention to take action to temporarily halt residential evictions, and ask the Secretary of the Treasury and the Secretary of Housing and Urban Development to identify federal funds to provide temporary financial assistance to help those struggling to meet their monthly rental or mortgage obligations; and (iii) allocate previously appropriated funds and ask for state contributions (in many cases from previously appropriated funds) to provide up to an additional $400 per week ($300 from the federal government and $100 from state governments) of unemployment compensation. For more on this, read our prior alert, “President Signs Four COVID-19 Relief Orders, Including Deferral of Certain Payroll Tax Obligations.”

Treasury Guidance Regarding Voluntary Deferral of Withholding and Payment

The presidential action regarding payroll tax obligation deferrals directed the Secretary of the Treasury to use authority under Internal Revenue Code Section 7508A to defer withholding, deposit and payment of certain employee payroll taxes on wages or compensation paid during the approximately 18 week period beginning Sept. 1, 2020, and ending Dec. 31, 2020 (the Payroll Tax Deferral Order, or the Deferral Order). The Secretary now has done so, through issuance by the Treasury and the IRS of Notice 2020-65 on Aug. 28 (the Notice).

One important clarification made by the Notice is that the Payroll Tax Deferral Order applies not only to the Social Security taxes that Americans with private sector jobs pay, but also to the Railroad Retirement Act (RRA) taxes that Americans employed by railroad companies and their subsidiaries pay under the parallel retirement system maintained for railway workers. A second important clarification pertains to the mechanics of the Deferral Order. The Notice makes clear that the employer’s remittance of taxes is tied to the postponement of the withholding. Thus, an employer may not defer any tax payment of taxes if it does not defer collecting those taxes from employees. Employers that choose to withhold taxes from employees must promptly remit them to the IRS with their other payroll taxes.

The Payroll Tax Deferral Order, by its terms, applies only to payroll taxes that otherwise are required to be withheld and remitted from wages paid to employees who earn less than $4,000 every two weeks (or the equivalent, depending on the employer’s payroll period), and only to the Old-Age, Survivor’s and Disability Insurance (OASDI) component, not to the Medical Insurance (MI) component. (The OASDI component imposes a 6.2% tax on an employee’s gross wages, subject to an annual limitation that will not be affected by the order. The RRA “Tier I” tax rates are the same.) The Payroll Tax Deferral Order notably also does not apply to or provide any sort of relief from either (i) the Self-Employed Contributions Act (SECA) tax that self-employed individuals are required to pay (typically with their quarterly estimated taxes) or (ii) the employer’s side of the Social Security (or parallel Railroad Retirement Act) payroll taxes. However, it is notable that the CARES Act separately permits both employers and self-employed individuals to defer the employer portion of OASDI otherwise payable through Dec. 31, 2020.

The Notice clarifies that the Payroll Tax Deferral Order applies to any employee who has wages of less than $4,000 for a given bi-weekly pay period (or $2,000 per week, or $8,667 per month), and applies on a pay period-by-pay period basis. The Deferral Order thus does not take into account an employee’s annualized income to determine whether it applies to a given payment of wages. That means any employee conceivably could qualify for the relief. Treasury and the IRS also have clarified, through the Notice, that the OASDI and RRA taxes being deferred are to be remitted and paid over to the federal government during the four-month period commencing Jan. 1, 2021, and ending April 30, 2021. Interest, penalties and other additions to tax thereafter will begin to accrue on any then-unpaid OASDI or RRA taxes covered by the Deferral Order. The Notice does not indicate whether special rules apply to employees paid by affiliated employers on multiple payrolls, or who work for a staffing company and concurrently perform services for several unrelated client-companies.

Complexity Associated with “Voluntariness”

Treasury Secretary Mnuchin has made clear in public statements that employers are not required to defer collection of employee taxes and thereby expose themselves to later liability to pay those taxes to the IRS. That position makes sense given the difficulty an employer may have collecting deferred taxes from an employee who quits or is terminated or otherwise does not remain employed with the same employer between Sept. 1, 2020 and April 30, 2021. The Notice itself provides that, “if necessary,” an employer “may make arrangements to otherwise collect” deferred employment taxes not collected from an employee any time during the period beginning Sept. 1, 2020 and ending Dec. 31, 2020.

Note that the Notice could be read as providing guidance inconsistent with state wage payment laws. State wage payment laws generally permit an employer to withhold payroll and other taxes without an employee’s written consent only if those taxes are then due and owing. The “postponement” of the due date for payment of taxes not withheld to “the period beginning January 1, 2021, and ending on April 30, 2021,” leaves room to argue that employers should not withhold and remit taxes unless employees consent to that withholding. We believe that the better reading of the guidance and related public statements, in their totality, is that the federal government has put the choice of withholding and paying – or not withholding and deferring payment – with employers. The Notice itself allows deferral only with respect to amounts an employer does not choose to withhold. While the Treasury Department’s “optionality” of deferring or not deferring by employer is not in writing, Secretary Mnuchin has made clear that Treasury and the Executive Branch of the federal government have decided to leave this decision to employers. We do not expect Treasury or the IRS to take actions inconsistent with Secretary Mnuchin’s clear statements.

Employers That Choose to Defer Collection and Payment

Employers that decide to defer payroll tax collections should consider reaching agreement in writing with each affected employee regarding how collections of deferred taxes (i.e., payments to the employer) will be accomplished if, for whatever reason, withholding from the employee in 2021 cannot occur. Some employers may ask for signed agreements from employees; others may feel comfortable, as a practical matter, simply notifying employees that any deferred payroll tax withholdings will be withheld from any final paycheck and, if the final paycheck amount is not sufficient, the employee will be required to make a separate payment to the employer.

Given the unusual nature of the Deferral Order and the Notice, and the complexity of federal and state laws relating to employer-employee relationships, employers need to carefully consider the legal risks associated with whatever actions they take, and weigh risks and benefits given their particular circumstances and employee relationships.

Authorship Credit: Jeffrey H. Paravano and John J. McGowan Jr.