IRS releases guidance on payroll tax deferral, but employers still have questions

(Comments: 3)

BACKGROUND: On August 8, President Trump signed the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, which directs the Treasury Department to defer collection of the employee portion of Social Security FICA taxes - which is part of required payroll tax withholding - from September 1, 2020 through the end of 2020. You can read our original blog post on that order here - however, please refer to the below for the latest guidance.

The IRS has released guidance on President Trump's payroll tax deferral, which can be read here in full. The IRS guidance was followed by comments from Treasury Secretary Steve Mnuchin stating that the deferral is voluntary and that employers may continue to withhold and deposit employee Social Security taxes in accordance with their normal schedule.

Here is what we now know about the payroll tax deferral:

The payroll tax deferral (Notice 2020-65) allows employers to defer the withholding, deposit, and payment of the employee's portion of Social Security tax for the period from September 1, 2020, through December 31, 2020, for employees with earnings below:

Weekly payroll $2,000.00
Bi-Weekly payroll $4,000.00
Semi-Monthly payroll $4,333.00
Monthly payroll $8,666.00

 

Employee eligibility for the deferral must be determined for each individual pay period. In other words, if an hourly employee’s wages are below the pay-period threshold for a given pay period, the employee’s share of Social Security taxes may be deferred. If, in the following pay period, the employee’s wages exceed the threshold, the employee’s share of Social Security taxes must be withheld and deposited on time.

These deferred taxes must be withheld and paid over the period of January 1, 2021, through April 30, 2021. In addition, any taxes not deposited by April 30, 2021, will be subject to interest and penalties.

This is where employers need to be careful.

The IRS guidance clearly places liability for the deferral of these taxes on the employer by stating the employer "may make arrangements to otherwise collect the total applicable taxes from the employee." The fact that the employer is responsible for repayment introduces several questions and concerns:

  • What if an employee were to leave the organization at any time before the deferred taxes are paid by April 30, 2021? Employers will still owe the tax.
  • What if an employee were to earn less during the 2020 payback period, or they simply object that they cannot afford to pay the deferred taxes?
  • Is an “eligible employee” responsible for making an affirmative election to defer their social security taxes?
  • For employers with tipped workers, it is not clear how the obligation to collect and deposit the deferred taxes will coordinate with the rules governing the withholding of taxes on tips.

The CPA Practice Advisor offers several suggestions to protect all parties should an employer consider implementing this program:

  • Be sure to inform employees of the expectation that deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021.
  • Have employees sign a contract agreeing to additional withholding up to twice the normal amount of Social Security taxes in the period from January 1 through April 30, 2021.
  • Include in the employee contract the agreement that the employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to such a time when all deferred payroll taxes have been repaid.
  • Have a plan in place to account for repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he or she earned in 2020.

Significantly, President Trump recently stated that if re-elected, he will terminate the payroll tax entirely (but still protecting Social Security). But this is not action that can be taken unilaterally; Congress would need to pass legislation explicitly terminating the payroll tax and/or forgiving the amount of deferred payroll taxes.

The biggest takeaway from both the IRS guidance and the payroll tax deferral itself is that there is no guarantee of forgiveness - and employers are likely loathe to take on the burden of responsibility for repayment, given the open questions and potentially troublesome or unfavorable ramifications for both themselves and their employees.

Despite this latest IRS guidance, tax specialists, industry experts, and others have indicated that there is simply not adequate information for the payroll tax deferral to be implemented in a way that makes sense and protects both employers and employees at this time. CheckWriters will continue to provide updates on this situation.

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