IRS Issues Guidance on Deferral of Employee Payroll Taxes
On August 8, 2020, the President issued a memorandum directing the Secretary of the Treasury to defer the withholding, deposit, and payment of the employee share of Social Security tax on certain wages paid during the period from September 1, 2020 through December 31, 2020. On August 28, 2020 the IRS issued Notice 2020-65 providing limited guidance on the implementation of the payroll tax deferral program.
Notice 2020-65 Guidance:
The notice provides that, for an Affected Taxpayer, the due date for the withholding and payment of the employee share of social security taxes on Applicable Wages paid during the deferral period from September 1, 2020 through December 31, 2020 will be postponed until the period beginning January 1, 2021 through April 30, 2021.
The notice defines an Affected Taxpayer as an employer that is required to withhold and pay the employee share of social security taxes.
The deferral is limited to the employee social security tax attributable to employees with Applicable Wages. Applicable Wages are defined as compensation paid to an employee during the deferral period, if the amount of wages for a bi-weekly pay period is less than $4,000 (or an equivalent amount for employers utilizing a different pay period.) The determination of Applicable Wages is made on a pay period-by-pay period basis.
An Affected Taxpayer must withhold and pay the deferred taxes ratably from wages paid between January 1, 2021 and April 30, 2021. Penalty and interest begin to accrue on May 1, 2021.
Observations:
- While not explicitly stated, both the Presidential Memorandum and IRS Notice imply that the deferral is optional, not mandatory.
- The significance of making the employer the Affected Taxpayer is that the employer holds both the authority to choose to defer tax (or not to defer) and the obligation to repay any deferred taxes.
- It appears that employers who participate in the deferral are at risk for an employee’s unrecovered social security taxes should any employee be terminated (voluntarily or otherwise) prior to April 30, 2021.
- An employer’s obligation to timely deposit/remit employee taxes is unchanged, if the employer forgoes deferral and continues to withhold the taxes from the employee.
- From an employee perspective, the maximum cumulative tax that can be deferred over the four-month period is $1,984 for an employee making $3,999 on a bi-weekly basis (8 pay periods assumed). The maximum deferral is effectively a series of $248 bi-weekly loans with a four-month maturity on each loan. The employee will repay the deferred taxes via additional withholdings from their payroll during the period from January 1, 2021 through April 30, 2021.
- Because determination of Applicable Wages applies on per pay period basis, the year to date earnings for a given employee appears to be irrelevant.
- The Presidential Memorandum directs the Secretary to explore avenues to eliminate the obligation to the pay the taxes deferred. However, many legal commentators have indicated that forgiveness would require congressional legislative action.
At Brown CPA Group, we are closely monitoring this developing situation. We will provide general guidance, as more certainty develops.
Please reach out to your Brown CPA Group professional team to discuss how we can assist with your business needs at 847.509.4100 or bcpa@browncpagroup.com
Contributors: David Thibault, Managing Partner; Barry Burchel, Tax Director
The topics above contain inherent state and local employment law considerations
that may need to be evaluated with your legal counsel.
