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September 1, 2020

New guidance on deferring employees' FICA share raises issues for employers

In Notice 2020-65 (issued August 28, 2020), the Treasury Department (Treasury) and Internal Revenue Service (IRS) allow employers to defer the withholding, deposit and payment of the employee share of Social Security tax for wages paid to certain employees until the end of the year.


IRC Section 7508A authorizes Treasury to specify a period of up to one year during which a taxpayer affected by a federally declared disaster may disregard deadlines for any act required or permitted under the Internal Revenue laws. The IRC Section 7508A regulations specify that employment tax is within the purview of IRC Section 7508A, but tax deposits under IRC Section 6302 are not.

The Old-Age, Survivors, and Disability Insurance tax (OASDI or Social Security) imposes a 12.4% tax on wages when paid by an employer to an employee. Half of the tax (6.2%) applies to the employer; the other half of the tax applies to the employee and must be withheld from the employee's wages by the employer when those wages are paid. A similar regime applies to railroad employers under the Railroad Retirement Tax Act (RRTA), which refers to "compensation" rather than "wages."

Regulations under IRC Section 6302 specify when an employer that has withheld Social Security or Medicare tax (collectively, FICA) from an employee's wages must deposit the withheld amounts. Depending on the amount of wages paid, the employer generally may be required to make these deposits on the next business day, within three to five business days, or by the 15th day of the following month. Failure to do so may cause the employer to incur a penalty under IRC Section 6656 of up to 15% of the amount of the underpayment.

Although the employee's share of FICA applies to the employee, the employer is separately liable for the employee's FICA tax on wages the employer pays. Under IRC Section 6205, an employer must deduct the tax from any employee remuneration it controls, unless the employer can otherwise collect the tax from the employee. Regardless of whether this amount can be or is collected from the employee, the employer remains liable to report and pay the employee's share. If the employer satisfies this liability by paying the employee's tax without any collection or reimbursement from the employee, the employer is further obligated to report additional wages to the employee equal to the tax paid on the employee's behalf.

IRC Section 6672 imposes a trust fund recovery penalty for a willful failure to collect or pay a tax that a person is responsible for collecting, accounting for, or paying. This penalty equals 100% of the amount not collected, accounted for, or paid and may be assessed directly against the responsible individual. In practice, IRS uses this penalty to collect from the responsible officers if the taxes cannot be collected from a corporation that has failed to pay employment taxes.

Notice 2020-65

Notice 2020-65 (the Notice) responds to a Presidential Memorandum issued on August 8, 2020, which directed Treasury to exercise its authority under IRC Section 7508A to defer, without penalties, interest or additional tax, the withholding, deposit and payment of the employee's share of Social Security tax for employees generally earning less than $4,000 in gross wages during any bi-weekly pay period. The memorandum further directed Treasury to explore avenues, including legislation, to eliminate the obligation to pay the deferred tax.

The Notice, issued on August 28, 2020, designates employers as taxpayers affected by the COVID-19 emergency and postpones the deadline for withholding and payment of certain employee Social Security tax (or the corresponding amount of RRTA) until the period from January 1, 2021 to April 30, 2021. The Notice does not affect Medicare tax or the employer portion of Social Security tax (the latter of which was separately deferred by the CARES Act). For employers that withhold, the Notice does not defer the deposit obligation, observing that separate relief is unnecessary because the deposit obligation arises at withholding.

Taxes eligible for deferral are employee Social Security tax on wages paid from September 1, 2020 to December 31, 2020, if the employee's wage amount for the bi-weekly pay period is less than $4,000 (or the equivalent amount if the pay period is not a bi-weekly pay period) (Applicable Wages). This "snapshot" approach to determining Applicable Wages disregards the employee's annual amount of wages and makes no distinction between regular and supplemental wages. If an employer does defer collecting employee Social Security tax on Applicable Wages, the employer must withhold and pay the taxes ratably from wages paid from January 1, 2021 through April 30, 2021. If necessary, the employer may arrange to otherwise collect the deferred taxes.

Practitioners have observed that the Notice does not expressly state that the deferral is optional for either the employer or the employee. IRC Section 7508A, however, does not have the authority to mandate this deferral. IRC Section 7508A states that "the Secretary may specify a period of up to one year that may be disregarded in determining, under the [Internal Revenue] laws, in respect of any tax liability of such taxpayer whether any of the acts described in paragraph (1) of [IRC Section] 7508(a) were performed within the time prescribed" (emphasis added). Accordingly, while Treasury has the authority to allow taxpayers to disregard a deadline, it has no authority to require them to do so.

In this case, the Notice designates employers as affected taxpayers, thus permitting employers to disregard the deposit deadline for the employee's share of FICA; employees are not designated as affected taxpayers, so they do not have permission to disregard the deadline on their own. To the extent the Notice could be read as ambiguous on this point, the accompanying information release states: "The Department of Treasury and Internal Revenue Service today issued guidance implementing the Presidential Memorandum issued on Aug. 8, 2020, allowing employers to defer withholding and payment of the employee's portion of the Social Security tax if the employee's wages are below a certain amount" (emphasis added).


The tax treatment for an employer that opts to defer withholding on the employee's FICA share will depend on future events that are quite uncertain. Consideration of the possible scenarios highlights the risks and employee-relations challenges.

  1. Employer stops withholding and the employee's tax is later forgiven via legislation. This is the most tax favorable outcome. Neither the employer nor the employee would be liable for the tax, and the employee has access to the funds once the employer stops withholding. The legislation may also address how the forgiveness would affect accrual of Social Security credits by the individual.
  2. Employer does not stop withholding and the employee's tax is later forgiven via legislation. If the tax is forgiven for all employees (or all those paid Applicable Wages), regardless of whether their employer elected to stop withholding, this is also a favorable outcome. The employee could claim a refund for the overpayment of Social Security tax, or the legislation could reduce taxes in the future to achieve a similar result. As in the first scenario, the legislation may also address Social Security credit accrual. If the legislation only forgives taxes for employees whose taxes were not withheld, however, employees whose employers continued withholding may be unhappy that the employer effectively denied them a benefit.
  3. Employer stops withholding and the tax is not later forgiven. This produces the least favorable outcome. Under the Notice, the employer's deferral of its obligation to withhold ends on January 1, 2021, at which point the employer must begin ratably withholding on employee wages to make up for the deferral by April 30, 2021. The "ratable withholding" appears to be a requirement preventing the employer from collecting a sort of "balloon payment" from a bonus or otherwise accelerating the collection. The Notice does not address contingencies, such as an employee who leaves before 2021 or during the "ratable withholding" period. Nothing in the Notice provides permanent relief from the obligations and penalties otherwise imposed on the employer. That is, the employer remains jointly and severally liable for the employee's tax, and subject to penalty if the tax is not paid. Additionally, interest and penalties are deferred until May 1, 2021, only for Applicable Wages. The Notice does not provide a reasonable, good-faith standard for determining Applicable Wages or relief from the normal penalties if an error is made in this determination. If the employer ultimately pays the employee's tax, the employer must report additional income and wages to the employee equal to the tax paid on the employee's behalf.
  4. Employer does not stop withholding and the tax is not forgiven. Although this outcome means that taxes are still due in the normal course, no adverse tax consequences or risks arise.

While stopping withholding may seem straightforward, many employers are likely to face significant administrative challenges preventing them from doing so quickly. As an additional nuance to the scenarios above, it seems that an employer could allow employees to opt in or out of Social Security tax withholding on Applicable Wages, although this approach would introduce additional complexity. In any event, an employer is not required to suspend withholding and is not further required to offer this choice to employees.

Continuing withholding but not depositing the tax is not a viable action. The Notice does not defer the obligation to deposit taxes once withholding has occurred. As a result, a wait-and-see approach of withholding and retaining the amounts may result in penalties for failure to deposit.

It is clear that an employer that suspends withholding is betting on future events; will Congress later forgive the unpaid Social Security tax? Members on both sides of the aisle have been reluctant thus far to include a payroll tax holiday in COVID-19 relief legislation. Significant participation in the withholding deferral could increase the likelihood that Congress will take action; given the uncertainty, however, it remains to be seen whether significant numbers of employers will take this option.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
   • Andrew Leeds (
Workforce Tax Services - Employment Tax Advisory Services
   • Kenneth Hausser (
   • Debera Salam (
   • Kristie Lowery (