Payroll tax deferral under IRS Notice 2020-65 allowed employers to temporarily stop withholding the 6.2% employee share of social security tax from eligible wages. The IRS released this guidance on August 28, 2020, in response to President Trump’s executive order signed on August 8, 2020. The notice answers three questions that employers and payroll professionals had been asking since the executive order was announced: who qualifies, how to calculate the wage threshold, and when deferred amounts must be repaid. You can read the full text directly from the IRS.
Before this guidance arrived, many professional organizations and large employers had pressed the IRS for details. Without clear rules, most companies were reluctant to change their payroll systems. IRS Notice 2020-65 filled that gap by setting specific income limits, defining the deferral period, and spelling out the repayment timeline that employers must follow. Employers weighing how this interacts with their broader obligations often turn to professional tax advisory services before adjusting payroll.
Who is eligible for the payroll tax deferral?
Wages of less than $4,000 per bi-weekly pay period qualified for the social security tax deferral. The IRS tied eligibility to the pay-period level rather than annual income, which means each paycheck is evaluated on its own. If an employee’s wages exceed the $4,000 threshold in a given pay period, those wages are excluded from deferral for that period alone. The next paycheck is evaluated independently.
For employers that run weekly, semi-monthly, or monthly payroll cycles, the IRS set an annualized income cap of $104,000. Companies must adjust the per-period threshold to match their specific pay frequency. A weekly payer, for example, would use roughly $2,000 per paycheck as the cutoff, while a monthly payer would use approximately $8,667.
The deferral was voluntary, and the IRS made it the employer’s option rather than the employee’s. Where an employer chose to defer, affected workers received an extra 6.2% in take-home pay during the deferral window, which ran from September 1, 2020, through December 31, 2020. Employers were not required to offer the deferral, and many chose not to because of the repayment risks described below.
How the social security tax deferral works in practice
When an employer elects to apply the payroll tax deferral, it stops withholding the employee’s 6.2% share of social security tax from each eligible paycheck. The money goes directly to the employee as additional net pay. No separate account or escrow is required during the deferral period, but employers must track the total amount deferred for each participating employee.
Employers should document every pay period in which wages fell below the applicable threshold and the deferral was applied. Accurate records are essential because the employer bears the compliance burden when repayment begins. If records are incomplete, resolving discrepancies with the IRS becomes significantly harder.
The employee payroll tax deferral applies only to the employee’s share of social security tax. The employer’s matching 6.2% share is not affected by this executive order. Employers continued to owe and deposit their own portion of social security tax on the normal schedule throughout the deferral period. The IRS summarized this employee-only scope in its official announcement implementing the presidential memorandum.
Payroll tax deferral repayment timeline and penalties
All deferred social security tax must be repaid between January 1, 2021, and April 30, 2021. Employers collect these amounts through increased withholding from employee paychecks during that four-month window. The IRS expects employers to spread the repayment evenly, though the notice does not prescribe a specific per-paycheck formula.
Any deferred amount that the employer has not collected and deposited by May 1, 2021, begins accruing penalties and interest. This is one of the most important details in the payroll tax deferral repayment rules: the liability falls on the employer, not the employee. Payroll taxes carry joint and several liability, which means the IRS can pursue the employer for the full amount if the employee fails to repay.
Employers who allowed the deferral needed to plan carefully for situations where employees leave or are terminated before repayment is complete. The IRS expects employers to collect any outstanding deferred payroll taxes at the time of separation. If the final paycheck is not large enough to cover the balance, the employer may be left absorbing the cost to avoid penalties.
Employer risks and why many companies opted out
Despite the extra take-home pay for employees, many employers decided not to participate in the payroll tax deferral. The primary concern was the repayment risk. If employees left the company before January 2021 or refused repayment withholding, the employer would still owe the IRS the full deferred amount plus any penalties and interest after the April 30 deadline.
Several large employer groups and payroll industry associations publicly stated they would not implement the deferral. Their reasoning centered on three points: the administrative complexity of tracking deferrals and repayments, the financial exposure if employees departed, and the uncertainty about whether the deferred amounts might eventually be forgiven.
President Trump stated during the campaign that if re-elected, he would forgive all deferred payroll taxes. However, the Executive Branch does not have the constitutional authority to levy or forgive taxes unilaterally. That power belongs to Congress. Given limited bipartisan support for the executive order, forgiveness would have required significant Congressional action that was never guaranteed.
How the employee deferral differs from the CARES Act employer deferral
The employee payroll tax deferral under IRS Notice 2020-65 is entirely separate from the employer-side social security tax deferral established by the CARES Act, which President Trump signed into law on March 27, 2020. The CARES Act allowed employers to defer their own 6.2% share of social security tax, with half due by December 31, 2021, and the remaining half due by December 31, 2022.
When both programs were active simultaneously, very few social security tax dollars were being collected from either the employer or the employee side. This created a temporary but significant reduction in contributions to the Social Security trust fund. Employers needed to track the two deferrals separately because they had different legal bases, different repayment schedules, and different consequences for noncompliance.
The CARES Act deferral was mandatory in the sense that all employers could take advantage of it without employee consent. The employee-side deferral under the executive order, by contrast, was an employer option rather than a mandate, and it placed the repayment burden squarely on the employer’s shoulders.
Key takeaways for employers and payroll professionals
Employers considering any future payroll tax deferral program should evaluate three factors before participating: the administrative cost of implementation, the financial risk of employee turnover during repayment, and the likelihood of legislative forgiveness. The 2020 experience showed that even when the IRS provides clear procedures, the practical challenges of collecting deferred taxes from employees can outweigh the short-term benefit.
Staying current with IRS guidance is critical whenever new deferral programs or executive orders are announced. Employers should monitor official IRS notices and consult with qualified tax advisors before making changes to their withholding procedures. Businesses that want help modeling repayment exposure and documenting deferrals can lean on outside client accounting services to keep payroll records audit-ready.
Frequently Asked Questions
What is IRS Notice 2020-65?
IRS Notice 2020-65 is the guidance the IRS issued on August 28, 2020, to clarify the payroll tax deferral authorized by President Trump’s executive order. It defines employee eligibility based on a $4,000 bi-weekly wage threshold, sets the deferral period from September through December 2020, and establishes the repayment window from January through April 2021.
Who qualifies for the payroll tax deferral?
Wages of less than $4,000 per bi-weekly pay period qualified for the social security tax deferral, and the deferral was the employer’s option rather than the employee’s. The IRS evaluated eligibility on a pay-period basis, so an employee who exceeded the threshold in one period might still qualify in the next. The annualized income limit was $104,000.
When must deferred payroll taxes be repaid?
Deferred social security taxes must be collected from employees and deposited with the IRS between January 1, 2021, and April 30, 2021. Any amounts not deposited by May 1, 2021, begin accruing penalties and interest, with the employer bearing responsibility for the unpaid balance.
Is the employer or the employee responsible for repayment?
The employer is ultimately responsible. Payroll taxes carry joint and several liability, meaning the IRS can collect the full deferred amount from the employer if the employee does not repay. Employers should collect any outstanding balance when an employee separates from the company.
How does the payroll tax deferral differ from the CARES Act deferral?
The CARES Act deferred the employer’s 6.2% share of social security tax, while IRS Notice 2020-65 deferred the employee’s 6.2% share. They have different repayment schedules, different legal authorities, and different risk profiles. Both programs were voluntary, but the employee-side deferral was the individual employer’s option rather than a mandate.
Can deferred payroll taxes be forgiven?
Forgiveness would require an act of Congress. While President Trump suggested during the 2020 campaign that he would forgive deferred amounts, the Executive Branch cannot waive tax obligations without Congressional approval. No forgiveness legislation was enacted, so all deferred amounts remained due under the original repayment schedule.
