On August 28, 2020, the Internal Revenue Service issued Notice 2020-65 (the “Notice”) in response to the August 8, 2020, Presidential Memorandum directing the Treasury to defer the withholding, deposit, and payment of the employee’s share of social security taxes on wages or compensation paid by employers from September 1, 2020 through December 31, 2020.
Before implementing a program that would allow employees to take advantage of the deferral relief, employers should carefully consider the many questions left unanswered by the Notice and ensure there is internal understanding about the Trust Fund Recovery Penalty, which allows the government, under certain circumstances, to hold certain individuals personally liable for, among other taxes, the employee portion of social security taxes, not ultimately collected, accounted for and paid.
Overview of the Notice
- All Employers that Withhold may take Advantage of the Relief.
The Notice provides that any employer that is required to withhold and pay the employee share of social security tax or the railroad retirement tax equivalent (“Applicable Taxes”) is considered to be affected by the COVID-19 emergency and able to take advantage of the relief (that is, each such employer is an “Affected Employer”).
Relief Limited to Wages Less than $4,000 during any Bi-Weekly Period.
The relief is available only to employees who are paid during any bi-weekly pay period wages or compensation less than $4,000, on a pre-tax basis, or the equivalent amount with respect to other pay periods (the “Threshold Amount”).
Relief Permits Deferral of Withholding and Payment of Applicable Taxes otherwise due during Last Four Months of 2020.
The due date for the withholding and payment of Applicable Taxes on wages or compensation that are less than the Threshold Amount paid to employees on a pay date occurring from and including September 1, 2020, through December 31, 2020 may be deferred until January 1, 2021 through April 30, 2021.
Taxes that were Deferred must be Withheld and Paid Ratably from Wages and Compensation Paid during First Four Months of 2021.
An Affected Employer must withhold and pay ratably from wages and compensation that are paid from January 1, 2021 through April 30, 2021, the total Applicable Taxes that were deferred. If necessary, the Affected Employer may make arrangements to otherwise collect the total Applicable Taxes from the employee.
Penalties will Apply for Failure to Timely Pay Deferred Taxes.
If the total Applicable Taxes that were deferred are not paid by that date, interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on the unpaid amount.
The Notice creates, or fails to address, a number of questions. For example:
- An Affected Employer generally will have to fund deferred Applicable Taxes during the first four months of 2021 through increased withholdings which, in turn, will reduce the employee’s take home pay during that period. What’s the best way to ensure employees understand the reduction in their pay in 2021? Even if the employees understand the program, could lower paychecks cause employee morale issues during the first four months of 2021? And, how does an Affected Employer collect the deferred Applicable Taxes from a former employee? Affected Employers might consider addressing these issues by requiring affected employees to acknowledge and agree, in writing, that any Applicable Tax withholdings the employee elects to postpone through year end must be repaid by the employee through increased withholding from the employee’s compensation paid during the first four months of 2021 and, if the employee ceases to be employed, all remaining unpaid deferred Applicable Taxes will be withheld from the employee’s final paycheck and/or will have to be otherwise repaid by the employee to the employer.
- Can the Affected Employer repay the deferred Applicable Taxes on behalf of the employee without withholding or collecting such Applicable Taxes from the employee? While the answer would appear to be yes, such a payment would appear to be considered additional taxable income for the employee and, thus, would be subject to income and payroll taxes and withholding.
- Are employers required to take advantage of the deferral of Applicable Taxes provided for under the Notice? The Notice itself does not appear to require deferral. This appears to be confirmed by a statement in Bloomberg’s Daily Tax Report indicating that “Treasury Secretary Steven Mnuchin has said he “can’t force” companies to stop withholding, but that he hopes many companies will participate.”
Other Consideration: Trust Fund Recovery Penalty
Although a full explanation of this penalty is outside of the scope of this update, any changes to the withholding, deposit and payment of the employee portion of social security taxes warrants a review of the Trust Fund Recovery Penalty (“TFRP”). Section 6672 of the Internal Revenue Code authorizes the TFRP, which is a penalty against any responsible person required to collect, account for and pay over certain taxes (including the employee portion of social security taxes) held in trust who willfully fails to perform any of these activities. The TFRP may be imposed for willful failure to collect tax, willful failure to account for and pay tax, or willful attempt in any manner to evade or defeat tax or the payment thereof. The TFRP is equal to the total amount of tax evaded, not collected, or not accounted for and paid over and the penalty allows the government to hold liable for any such amounts parties otherwise shielded from tax liability. With no indication to the contrary contained in the Notice, the TFRP could apply to Applicable Taxes deferred pursuant to the Notice. Therefore, certain individuals at an Affected Employer could, under certain circumstances, find themselves subject to the TFRP if, for example, the Affected Employer experiences a business downturn or financial hardship after deferring Applicable Taxes and, as a result, lays off or furloughs employees prior to payment of deferred Applicable Taxes, but then is unable to collect the deferred Applicable Taxes from those employees and does not otherwise have liquidity to pay out of its own funds. Thus, any employer considering implementing the relief afforded under the Notice should fully understand and brief appropriate parties about the potential implications of the TFRP.
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