During negotiations earlier this year between the White House and Congress over a potential third round of COVID-19 relief legislation, the idea of a Social Security payroll tax holiday was raised as a possible means to provide relief to American workers. A payroll tax holiday would consist of a temporary reduction or elimination of the employee’s share of the Social Security tax (which currently equals 6.2% of an employee’s 2020 wages up to the Social Security wage base of $137,700). Ultimately, however, the negotiations were unsuccessful, and no payroll tax holiday has been enacted.
Lacking the authority to unilaterally reduce the Social Security tax, President Trump issued an executive order on August 8 directing the Treasury Department to permit employers to defer the withholding and remittance of certain payroll taxes otherwise due during the last four months of 2020. On August 28, the Treasury Department issued Notice 2020-65 to provide guidance on the president’s executive order.
Under Notice 2020-65, an employer that chooses to do so may defer until early 2021 the withholding and remittance of an employee’s share of Social Security tax on certain wages paid during the last four months of 2020. In particular, the employer can choose to defer the withholding and remittance of the 6.2% employee share of Social Security tax imposed on wages paid to the employee on any pay date occurring during the period from September 1 through December 31, 2020, but only if the amount of wages paid to the employee on the applicable pay date is less than $4,000 for a bi-weekly pay period or the equivalent threshold for a different pay period, e.g., $8,000 for a monthly pay period.
Any Social Security tax withholding that an employer chooses to defer under Notice 2020-65 must be withheld and remitted to the government ratably from wages paid to the employee on pay dates occurring during the period from January 1 through April 30, 2021, and the deferred withholdings are in addition to all regular payroll withholdings required on wages paid during the first four months of 2021. Employers face interest, penalties and additions to tax on any deferred 2020 Social Security taxes that are not timely withheld before May 1, 2021.
Unless and until Congress enacts a payroll tax holiday, the potential benefit to employees under Notice 2020-65 is quite limited, and any benefit comes at the cost of significant administrative challenges and tax risks to employers. As such, we expect that most employers will disregard Notice 2020-65 and instead continue to satisfy their payroll tax withholding obligations in the normal manner.
In effect, the benefit to an employee of payroll tax deferral under Notice 2020-65 is equivalent to a short-term (roughly four-month) interest-free loan of a limited amount. For example, the total amount of Social Security tax that may be deferred under Notice 2020-65 is $2,232 ($248 per pay period) for an employee who is compensated at the maximum rate of $3,999.99 for each of nine bi-weekly pay periods from September 1 to December 31, 2020. The payroll tax amount that could be deferred for lower-compensated employees is correspondingly reduced, while employees receiving wages at or above the $4,000 bi-weekly threshold (the equivalent of $104,000 in annual wages) are not eligible for deferral. Although employees may appreciate the extra cash flow during the last four months of 2020, the requirement that this “loan” from the government be repaid by employer withholding during the four-month period commencing in January 2021—on top of regular 2021 payroll tax withholding—may cause a greater hardship to employees in some cases.
We also do not see any real risk that employees might “miss out” on a meaningful benefit if their employers choose not to implement payroll tax deferral under Notice 2020-65. If Congress ultimately enacts payroll tax holiday legislation, affected employees should be able to recover any “overpaid” payroll taxes by refund claims or other procedures that may be established under such legislation.
To provide its employees with this “benefit,” an employer would incur the cost and address the challenges of changing its payroll tax procedures twice in the next eight months, before returning to “normal” payroll procedures in May 2021. Further, any employer contemplating deferring Social Security tax withholding under Notice 2020-65 first needs to carefully consider other administrative challenges and risks, especially the tax compliance risks it would incur with respect to employees whose employment terminates before deferred payroll taxes have been fully withheld. While Notice 2020-65 indicates that an employer is permitted to make unspecified “arrangements” to collect the deferred Social Security taxes from an employee, it is easy to imagine scenarios in which an employer is left “holding the bag” when it comes to satisfying any deferred payroll tax withholding obligations with respect to former employees.
At the end of the day, payroll tax deferral under Notice 2020-65 is voluntary, and we do not expect many employers to embrace voluntary deferral in light of the limited benefit to employees and the challenges described above.