Seyfarth Synopsis: On August 28, 2020, the Internal Revenue Service ("IRS") issued guidance (the "Guidance") to implement the payroll tax withholding and payment deferral provided for in President Trump's Presidential Memorandum of August 8, 2020 (the "Presidential Memorandum"), which we addressed here. The Guidance clarifies certain aspects of the payroll tax relief, particularly its scope (e.g., the relief applies only to the employee portion of social security taxes for employees whose wages during a bi-weekly payroll period are less than $4,000) and the period over which the deferred payroll taxes must be paid (ratably between January 1 and April 30, 2021). While the Guidance clarifies certain aspects of the Presidential Memorandum, certain aspects of the payroll tax deferral remain unresolved.
Late on August 28, 2020, the IRS issued Notice 2020-65 (the Guidance) implementing the Presidential Memorandum directing the Secretary of the Treasury to defer the withholding and payment of certain payroll taxes. Under the Guidance, employers are allowed to defer the withholding and payment of the employee portion of social security tax (but not Medicare tax, which must still be withheld and paid) on wages paid during the period of September 1, 2020 through December 31, 2020, but only if the employee's wages payable during a bi-weekly payroll period are less than $4,000, or the equivalent amount for other payroll periods. This determination is made separately for each payroll period.
We note that the Guidance itself does not make it explicit that the payroll tax deferral is elective and at the employer's (rather than the employee's) discretion, however, the news release accompanying the Guidance (IR-2020-195, August 28, 2020) refers to the Guidance as "allowing employers" and the Guidance defines employers as being the "Affected Taxpayers".
The Guidance is clear that it only allows for a tax deferral and it does not eliminate the employer's or employee's liability for deferred payroll taxes. An employer that defers an employee's payroll taxes pursuant to the Guidance must withhold and pay all of the deferred taxes ratably from the employee's wages that are paid during the period January 1, 2021 through April 30, 2021 (the "Payment Period"). If the employer does not pay all the deferred payroll taxes by May 1, 2021, interest, penalties and additions to tax will begin to accrue on the unpaid taxes. The Guidance further provides that, if necessary, an employer may make arrangements to otherwise collect the deferred payroll taxes from an employee, but it is not clear what this means. Because the Guidance defers the employer's obligation to deposit payroll taxes by deferring the employer's payroll tax withholding obligation, it does not seem such other arrangements could include a partial payroll tax withholding without a corresponding payroll tax deposit.
Although the Guidance answers some questions concerning the payroll tax deferral, it leaves other questions unanswered. For example, the Guidance does not consider the scenario in which an employee's employment terminates before May 1, 2021 and the employer is unable to recoup all of the deferred payroll taxes through withholdings from the employee's wages. The employer would presumably remain liable for any deferred payroll taxes that remain unpaid before May 1, 2021. Employers, especially those that know that not all of their 2020 employees will remain employed through the end of the Payment Period, such as retailers who hire extra employees exclusively for the holiday season, should consider requiring their employees to agree to the withholding of all previously deferred payroll taxes from any severance pay, final paycheck or other payment made upon termination (subject to applicable labor and employment laws) or even foregoing the payroll tax deferral completely rather than risking having to pay an employee's deferred payroll taxes.
Further, even though employees seem to be the beneficiaries of the payroll tax deferral-as noted above, an employer cannot defer the payroll tax payment without deferring its withholding-the Guidance does not seem to provide employees with any discretion in this regard. Thus, an employee who understands that any payroll taxes deferred in 2020 will need to be paid in 2021 may prefer the comfort of fixed paychecks rather than the fluctuating cash flow brought about by larger paychecks in 2020 and smaller paychecks in 2021. However, under the Guidance, it does not seem such employee could require its employer to forego the payroll tax deferral.
As explained above, the Guidance requires an employer that previously deferred the payment of any payroll taxes to pay such deferred taxes ratably from an employee's wages during the Payment Period, and that any amounts unpaid by May 1, 2021 will begin to accrue interest, penalties and additions to tax. Many employers pay wages on Fridays or on the last day of the month, which coincide in the case of April 30, 2021, and many employers do not deposit withheld taxes on the day after wages are paid. Accordingly, it would appear that such employers who choose to defer payroll taxes would need to alter their payroll tax deposit schedule to avoid incurring interest and penalties on the deferred taxes that are recouped from their employees' April 30, 2021 paychecks. 
Hence, although the Guidance answered some questions, it did not eliminate all the uncertainty surrounding the payroll tax deferral. Assuming that the deferral is indeed at employers' discretion, employers that decide to defer employee payroll taxes in 2020 risk having to pay the deferred taxes themselves in 2021 to the extent their employees are no longer employed by them in any portion of the Payment Period. Further, employees whose payroll taxes are deferred will need to be prepared to receive smaller paychecks than usual during the first third of 2021 and employers will need to be prepared for potentially disgruntled employees in 2021. Employers should carefully consider all the consequences, including the possible added administrative burden, before they decide to defer payroll taxes pursuant to the Guidance. However, if, as the President apparently desires, the payroll tax deferral ultimately becomes a tax waiver, many of these open issues will become irrelevant. We note, though, that it would take Congressional action to convert the deferral to a waiver. Further, such action is not on any legislative calendar nor, given that earlier payroll tax relief proposals were opposed by legislators from both parties, does it appear otherwise to be forthcoming.