Late in the afternoon of August 28, 2020, the Internal Revenue Service (IRS) issued Notice 2020-65 (the Notice) permitting the deferral of employers’ obligation to withhold and deposit with the IRS the employee portion of certain social security (and related railroad retirement) taxes imposed under Sections 3101(a) and 3201(a) (FICA Withholding Taxes) of the U.S. Internal Revenue Code of 1986, as amended (the Code). The Notice follows President Trump’s August 8, 2020, executive memorandum (the Memo) directing the IRS to issue such guidance, and the deferral period begins on September 1. While the Notice specifies how FICA Withholding Tax deferral is to be effected and how deferred amounts are to be collected, a number of significant questions remain unanswered.

In particular, consistent with the Memo, the Notice defers an employer’s withholding and deposit obligations with respect to FICA Withholding Taxes otherwise due on amounts paid during the period between September 1 and December 31, 2020, to employees who receive less than $4,000 of wages and other taxable compensation for a particular bi-weekly pay period (Applicable Wages). Determining whether payments made to an employee will constitute Applicable Wages (and, if so, how much) is made on a period-by-period basis.

In what may be a significant (and unwelcome) surprise to many given that Treasury Secretary Mnuchin reportedly said on August 12 that any FICA Withholding Tax deferral would be at the employer’s option, the Notice does not explicitly provide for employer discretion regarding its implementation or clearly authorize employers to unilaterally decide to forego the deferral permitted by the Notice by continuing to withhold and remit applicable FICA Withholding Taxes from Applicable Wages. At the same time, the Notice does not specifically require employers to immediately defer the withholding and payment of applicable FICA Withholding Taxes from Applicable Wages until 2021. Instead, the Notice solely stipulates that the due date for the withholding and payment of applicable FICA Withholding Taxes is postponed for all employers until the period beginning on January 1 and ending on April 30, 2021.

Absent further action, any FICA Withholding Taxes deferred under the Notice will be due by April 30, 2021, with interest, penalties and additions to tax accruing on unpaid amounts from May 1, 2021. Moreover, the Notice establishes that employers (and not employees) will be primarily responsible for the payment of any FICA Withholding Taxes deferred under the Notice. While the Notice provides that such liability should generally be satisfied via ratable withholding from wages and other taxable compensation paid between January 1 and April 30, 2021, it authorizes employers to “make arrangements to otherwise collect [such amounts] from the employee,” without specifying what those arrangements may include.

Next Steps for Employers to Consider Now

The questions and concerns raised by the Notice, and the practical implications associated with implementation of the FICA Withholding Tax deferral potentially required for pay periods starting September 1, will ultimately depend on an employer’s particular facts and circumstances. Given the absence of any current clear authority under the Notice (or the Code), employers appear to have some degree of flexibility (subject to consideration of any applicable state law requirements) on how to address FICA Withholding Taxes from Applicable Wages following the Notice. We expect employers to consider several options based on input from accounting firms, tax professionals, payroll and human resource providers, and legal counsel.

Some employers may elect not to defer and continue to withhold and deposit employees’ FICA Withholding Taxes, taking the position that the Notice permits, but does not require, deferring the withholding and payment of applicable FICA Withholding Taxes from Applicable Wages to the “postponed” due date in 2021, perhaps relying in part on Treasury Secretary Mnuchin’s statement several weeks ago that the IRS “can’t force” employers to stop withholding payroll taxes from employees' paychecks. Employers taking this approach should of course closely monitor any further guidance issued by the IRS. Employers taking this approach should be prepared to respond to potential questions from, and potential legal claims by or on behalf of, employees who would prefer to receive additional amounts in their paychecks in 2020 and defer the withholding of the FICA Withholding Taxes from Applicable Wages until 2021 (perhaps also with the hope that Congress may ultimately pass a law not requiring such deferred taxes be withheld and paid next year).

Other employers may begin deferring FICA Withholding taxes as soon as possible. Employers wishing to take this approach may encounter timing issues with payroll providers, and will need to determine how to address any FICA Withholding Taxes from Applicable Wages that may be withheld from one or more paychecks after September 1 before the withholdings can stop and the deferral is implemented.

Another option for employers at this time may be to:

1. Provide eligible employees the opportunity to elect to have any FICA Withholding Taxes on Applicable Wages deferred until the period beginning January 1, 2021.
2. Clearly inform such employees that any deferred amounts will be collected via increased withholding from applicable paychecks between January 1 and April 30, 2021.
3. Require any employee that opts into such deferral to agree in writing that, if the employee’s employment with the employer ends for any reason, whether at the initiative of the employer or the employee, before April 30, 2021, the employer will be entitled to recover from the employee any deferred FICA Withholding Tax amounts that remain unpaid at the time of such employee’s departure through (a) withholding of the entire unpaid amount (or the maximum amount that may be deducted under applicable state law) from the employee’s final paycheck and (b) if the owed amount cannot be deducted from the employee’s final paycheck or the final paycheck amount is insufficient to cover the remaining unpaid amount in full, obtaining a payment of that shortfall from the employee shortly after employment ends.

Of course, given the compressed time frame, there may be practical obstacles to the implementation of any option that differs from the status quo. It is also possible that further guidance may be forthcoming from the Department of the Treasury on the subject, because it seems likely that this Notice – issued at the eleventh hour – will trigger significant comments and questions from payroll providers and other interested parties.