Authored by RSM US LLP

On August 29, Treasury released Notice 2020-65 (the Notice) in response to President Trump’s August 8th memorandum requesting a delayed due date for employee’s share of Social Security tax for the remainder of 2020 (specifically, September 1 through December 31). Previously, the CARES Act deferred the employer’s portion of Social Security tax for 2020; the tax that is being addressed with current guidance is the employee’s portion of Social Security tax (i.e. not the employer’s portion and not federal income or Medicare tax). 


The President’s memorandum was an attempt to help workers in response to the on-going COVID-19 pandemic, issued when Congress was not able to come to consensus on a new stimulus package to provide individuals’ additional relief. By deferring the due date for certain payroll taxes that would normally be withheld from employees’ paychecks, those employees will receive more net pay for the four months the memorandum covers. However, the President only has the power to ask for deadlines to be delayed under specific disaster provisions and, therefore, the tax is still owed, but payable later than it otherwise would be. Thus, any paycheck increases now will result in reduced paychecks in the future (absent Congressional action to forgive the tax or otherwise reduce the future liability). The Administration has noted that it will ask Congress to forgive the tax, but this will need to be a Congressional decision.

Guidance issued

The President’s memorandum provided little detail as it serves only as a mechanism to ask Treasury to supply guidance. In the past few weeks, many employers, payroll providers and other professionals have contemplated many practical issues with the delayed deadline, and eagerly awaited Treasury’s release to determine a course of action. Unfortunately, the Notice does not provide as many answers as employers may have hoped for. The following summarizes the main factors in the payroll deferral:

  • How do you determine who is eligible? The President’s memorandum made the payroll tax deferral available to employees who make less than $4,000 during any bi-weekly pay period (or presumably about $104,000 per year). The Notice clarifies that wages as defined in sections 3121(a) or 3231(e) for September 1 through December 31 are eligible, “but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.” Thus, employers must look to wages by pay period, irrespective of other periods, and the $4,000 (or equivalent) is basically a cliff. Someone who earns $4,001 for that period is not eligible for the deferral in that pay period on any part of his or her wages.
  • When is deferred tax due? The Notice provides that the deferred taxes are due ratably from Jan. 1 through April 30, 2021, providing only a four month deferral period. For those concerned about employees getting more cash now only to receive less later, this deferral period likely does not alleviate those concerns as it essentially means saving 6.2% on wages for the next four months and then paying 12.4% (that is, the employee will pay regular Social Security on their wages in early 2021 and pay back the deferred 6.2% for the following four months (as opposed to having a longer payback period that would not see each paycheck reduced by as much during the payback period). 
  • How do employees pay it back? Although many were hoping for Treasury to provide a mechanism under which the employee would pay the deferred tax back through a means other than by employer withholding, the Notice does not provide this. The Notice requires the employer to withhold and pay the deferred tax ratably from Jan. 1 through April 30, 2021. The Notice does state, “If necessary, the Affected Taxpayer [i.e. the employer] may make arrangements to otherwise collect the total Applicable Taxes from the employee.” This might include an employer offering employees a longer ‘payroll loan’ with the employer depositing the deferred social security taxes within the time frame. However, the ‘other arrangements’ language may also be an instruction to employers whose employees have separated service before the repayment period is over. 
  • Is it mandatory? Treasury Secretary Steven Mnuchin announced publicly on August 12 that the deferral would not be mandatory. In other words, employers can choose to continue to withhold and remit this tax, despite a delayed deadline. Information Release 2020-195 also issued on Friday describes the Notice as “allowing employers to defer” but nothing states that it is required.

Employer action

With a release date only a few days before the September 1 effective date, it is virtually impossible to defer withholding on eligible pay for the entire four month period. Employers who are willing to follow the Notice and implement it as soon as possible still must consider whether they are willing to potentially cover the tax for employees who terminate employment or do not have enough wages for Jan. through April to cover the deferred withholding. Employers will also have to work closely with their payroll providers to implement this change in deposits.

The Notice leaves unanswered questions that may or may not be covered in future guidance from the IRS such as:

  • Should the employer allow employees to choose between deferral and no deferral or should it be automatic (most discussion to date has suggested that employees should not be burdened with a future payment unless they specifically agree to that burden)?
  • If an employee terminates employment owing back Social Security taxes, can an employer do catch-up withholding from the final paycheck?
  • Can an employer require an employee to sign a promissory note for the deferred tax amount?
  • If an employer is unable to collect the tax from an employee and pays that tax for the employee, is the payment of the tax additional wages? It would seem to be, and as additional wages, additional Social Security and income tax withholding would apply, all of which would be employer costs.
  • How does an employer prioritize the collecting repayments? Does the employer remit an employee’s health care and other welfare benefit premiums and 401(k) contribution first and then collect the deferred Social Security tax. Or will the employer have an obligation to collect the deferred tax first?

Whether employers choose to follow the Notice or not, an employer should strongly consider letting its employees know whether deferral will be an available option, as many individuals are aware of the President’s action and may expect increased paychecks.