Legal Alerts

COVID-19 Response: Presidential Payroll Tax Deferral - Availability and Employer Responsibilities

Washington, D.C. (August 31, 2020) - On August 28, 2020, the United States Department of the Treasury and the Internal Revenue Service issued guidance implementing the Presidential "Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (August 8, 2020)." IRS Notice 2020-65 (August 28, 2020).

Previously, we alerted readers to the Presidential Memorandum in our August 14 alert "COVID-19 Response: Presidential Payroll Tax Deferral-Knowns and Unknowns."

Now, we describe the availability of this tax deferral to employers, defined in the Notice as "Affected Taxpayers." We also point out responsibilities of employers who choose to defer eligible payroll taxes.

The Notice defers but does not forgive taxes; they eventually must be paid as later described.

This is a voluntary program. Employers may but are not legally required to defer these taxes. Employers who choose not to defer eligible payroll taxes should withhold and remit the taxes by their normal due dates.

Employers also may decide with respect to which employees (if any) the employer chooses to defer eligible taxes. The Notice does not require an employer to defer the taxes for all eligible employees.


An employer (Affected Taxpayer) may choose to defer withholding and paying over to the federal government "Applicable Taxes" on "Applicable Wages."

"Applicable Taxes" consist of the employee share of Social Security tax (6.2%) that an employer normally must withhold from paychecks and remit to the federal government. Applicable Taxes do not include the employee share of the Hospital Insurance component (1.45%) of FICA taxes.

Under the Notice, employers that choose to defer withholding Applicable Taxes will not be subject to IRS penalties for failing timely to deposit the taxes.

The Notice does not address whether an employer must defer 100% of the eligible taxes for an employee or, alternatively, may defer less than 100% of them. Subject to additional guidance from the IRS, employers would be well advised to defer 100% of the taxes.

"Applicable Wages" consist of wages (as defined in Internal Revenue Code Section 3121(a)) or compensation (as defined in Internal Revenue Code Section 3231(e)) paid to an employee "on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020." However, eligible Social Security taxes may be deferred only if the amount of the wages or compensation paid to the employee 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."

The Notice’s reference to "equivalent threshold amount with respect to other pay periods" seems intended to accommodate situations in which employees are compensated other than bi-weekly. For example, an employee who is paid monthly apparently can have eligible taxes deferred if paid less than $8,000 for the month.

Applicable Wages must be determined "on a pay period-by-pay period basis."

Example: An employee is paid bi-weekly. For the first two weeks of September 2020, the employee receives wages less than $4,000. For the last two weeks of September, the employee receives more than $4,000. The employee could be paid more, for example, because of receiving a bonus. In this example, the employer may defer the employee’s Social Security tax for the first two weeks of pay in September but not for the last two weeks of September.

Amounts normally not taxable to employees are ignored in determining whether wages or compensation are less than the threshold amount ($4,000 bi-weekly or equivalent). Items ignored include, for example, short-term and long-term sickness or accident disability; employer contributions (e.g., matching contributions) to a 401(k) or other qualified retirement plan; and amounts an employer pays into a cafeteria plan that are normally not considered wages.

Employer Responsibilities

Applicable Taxes may be deferred, but not (under the Notice) forgiven. An employer that has deferred Applicable Taxes must withhold and pay them “ratably from wages and compensation paid between January 1, 2021 and April 30, 2021." Otherwise, interest, penalties, and additions to tax will begin to accrue on the deferred taxes beginning May 1, 2021.

In the Notice, the word "ratably" apparently means that an employer must spread the additional withholdings over the entire period from January 1, 2021 through April 30, 2021.

"If necessary," according to the Notice, an employer may “make arrangements to otherwise collect the total" deferred taxes "from the employee" instead of withholding them starting January 1, 2021. According to the Notice, "the total" Applicable Taxes must be collected through such an arrangement rather than being withheld.

The Notice does not describe circumstances under which an employer may satisfy deferred taxes "if necessary" other than by withholding and remitting them. Possible scenarios might include that the employer starting January 1, 2021, is no longer paying wages or compensation to the employee because the employee has ceased to be employed.

What Employers Should Do Now

Employers should now decide whether to defer eligible taxes and with respect to which employees.

Employers that contract payroll preparation to third parties should coordinate with the third-party provider to make sure that taxes are deferred as desired.

Other employers should carefully track any taxes they defer. Whether an employer uses a third-party or directly prepares payroll, deferred taxes will have to be satisfied from January 1, 2021 through April 30, 2021.

Lewis Brisbois’ tax team will continue to monitor this issue and plans to provide further updates if the government issues additional implementing guidance or as other substantive developments occur. For more information, contact the authors of this alert. Visit our COVID-19 Response Resource Center for more alerts on the many areas of the law impacted by the pandemic.


Michael J. Grace, Partner

John J. Heber, Partner

Sara Jane Holland, Partner

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