On August 28, 2020, the IRS issued explanatory guidance on payroll tax deferral in response to an executive action signed by President Trump earlier in the month.
The IRS guidance (Notice 2020-65) on payroll tax deferral not only helps implement the executive action, it also offers employers some explanation as to how they can defer both withholding and payment of an employee’s share of Social Security tax when the employee’s wages fall below a certain threshold.
Although the executive order gives employers the opportunity to elect to defer the payroll tax, employees will still be obligated to pay Social Security taxes in the future (barring any Congressional legislation) via additional withholding from their paychecks
Payroll Tax Deferral Memorandum
In response to hardships imposed by the coronavirus pandemic, Trump signed a Presidential Memorandum early in August that permits the deferral of the employee portion of Social Security taxes for certain employees.
The memorandum directed the Treasury Department to defer withholding, deposit, and payment of an eligible employee’s share of Social Security taxes on wages or compensation paid between September 1, 2020 and December 31, 2020. It applies to employees whose wages or compensation, paid during any biweekly pay period, are less than $4,000. The payroll taxes deferred can be delayed without employers incurring any penalties, interest, or added tax.
Rules of the New Guidance
Notice 2020-65 effectively allows employers to postpone the withholding and payment of the employee’s share of Social Security tax until the period beginning on January 1, 2021 and ending on April 30, 2021. Starting on May 1, 2021, penalties, interest, and additions to tax will begin to accrue against any taxes that remain unpaid as of that date.
As the payroll tax deferral only allows for the deferral on Social Security taxes but does not make an allowance for the forgiveness of tax, many employers are still struggling with how best to implement.
Although the payroll tax deferral guidance permits the employer to collect the total amount of taxes due from the employee, no clear rules or instructions have been laid out as to how the employer can collect that tax from employees who may leave their jobs before the deferred taxes come due.
Detractors on the Issue
Many business groups, such as the U.S. Chamber of Commerce, The National Payroll Reporting Consortium, and other trade associations, have deemed the implementation of payroll tax deferral both challenging to implement as well as unfair to employees who may be faced with larger tax bills if their employers exercise the option. Recognizing this, many employers may choose to withhold and pay required payroll taxes to the government, just as they have done in the past.
We will keep you updated as additional information about payroll tax deferral becomes available. If you need assistance about how to move forward, in the near term, please reach out to your Untracht Early advisor.