U.S. Treasury & IRS Implement Optional Payroll Tax Deferral Program
On August 8, 2020, President Trump signed a Presidential Memorandum directing the Secretary of the Treasury to use his authority to defer the withholding, deposit, and payment of certain payroll tax obligations. On August 28, 2020, the Secretary of the Treasury issued Notice 2020-65 implementing the optional payroll tax deferral program.
Pursuant to the Notice, employers may defer the withholding, deposit and payment of an employee's portion of Social Security taxes on wages paid from September 1, 2020 through December 31, 2020. The deferral is only available for employees whose pretax wages or compensation during a bi-weekly pay period is less than $4,000 (or the equivalent amount with respect to pay periods of a different length, e.g. $2,000 for a weekly pay period). For employees who earn more than this amount during the pay period, no deferral is available. The determination is made on a pay period by pay period basis – meaning that an employee may be eligible in one pay period if their pay is below the threshold, but ineligible in another pay period if their compensation exceeds the threshold.
Employers are not required to defer tax payments, but instead may choose to opt out. Employers who elect to defer withholding an employee's portion of Social Security taxes must withhold and pay the total amount deferred ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. For example, if the employer defers withholding $100 in payroll taxes during each pay period in the 2020 deferral period, the employer must defer and withhold that $100 (in addition to all other required withholdings) during each pay period in the 2021 re-payment period. Failure by the employer to withhold and pay the deferred taxes by May 1, 2021 will result in interest, penalties and additions to tax beginning to accrue against the employer.
The Notice does not directly address a situation where an employee leaves employment before all deferred taxes are withheld and repaid in 2021. The Notice states: "If necessary, the Affected Taxpayer may make arrangements to otherwise collect the total Applicable Taxes from the employee." In doing so, employers must ensure compliance with all state and federal laws. For example, under the Illinois Wage Payment and Collection Act, deductions are only generally permitted if there is a written consent signed by the employee at the time the deduction is made (as opposed to a future promise to pay back the taxes if the employee leaves the company). Accordingly, for Illinois employers, a signed authorization to deduct an undetermined amount from future wages in 2021 would be unlawful. Employers should consider these issues prior to opting in to the deferral program.