Guidance on Optional Payroll Tax Deferral

On August 28, 2020, the IRS issued Notice 2020-65, which provides guidance for the optional payroll tax deferral available to employers for the period of September 1, 2020 to December 31, 2020.

During that period, employers are permitted, but not required, to delay the withholding and payment of the employee-share of the Social Security tax for employees who are paid less than $4,000 for a bi-weekly pay period (or the equivalent threshold amount for employees that are paid on any other schedule).

The notice indicates that employers who choose to defer such withholding and payment must withhold the total of such deferred taxes from the wages and compensation paid to affected employees between January 1, 2021 and April 1, 2021.  Such withholding is required to occur ratably during each of the pay periods occurring during that time period.  The notice also indicates that employers, if necessary, may make arrangements to otherwise collect the taxes due from the employee. 

Finally, the notice indicates that the employer will be subject to interest, penalties and additions to tax beginning on May 1, 2021 with respect to any such unpaid taxes.

Under this guidance, the employer is responsible for collecting and remitting the deferred taxes, and if the employer is unable to collect such taxes from an employee (e.g., the employee is no longer working for the employer during the period of January 1, 2021 to April 1, 2021), the risk of payment of the tax (along with possible interest and penalties if it is paid late) falls exclusively on the employer.

For this reason, it appears prudent for employers NOT to elect to follow this optional payroll tax deferral.