IRS Provides Employer Guidance on Payroll Tax Deferral
Many Questions Remain Unanswered
August 31, 2020
On Friday, August 28, the IRS issued much-anticipated guidance on the payroll tax deferral that was ordered in a presidential memorandum by President Trump on August 8, 2020. As a reminder, this order allows employers to defer withholding and payment of certain payroll taxes on wages paid between September 1, 2020, and December 31, 2020.
The newly released IRS guidance (Notice 2020-65) provides employers with clarification on a few areas of uncertainty, including how repayment of the deferred taxes is to be made and how compensation is defined. Key points of clarification provided by the IRS notice include:
- All employers who are obligated to withhold FICA taxes from their employees’ wages are subject to the deferral.
- Employers can defer the withholding, deposit, and payment of applicable payroll taxes from September 1 through December 31. Applicable taxes include the employee portion of the old-age, survivors, and disability insurance (OASDI) tax and Railroad Retirement Act Tier 1.
- The deferral only applies to employees who make less than $4,000 (before taxes) on a bi-weekly (or similar) basis. The IRS guidance clarifies that the required wage threshold determination must be made on a pay period-by-pay period basis, which could result in employees who have taxes withheld in one pay period but not in the next.
- The deferral is not a “payroll tax cut” and does not allow for forgiveness. (The president alone cannot enact forgiveness, complete forgiveness would have to come from an act of Congress.)
- Affected taxpayers are defined as employers, not employees. Beginning January 1, 2021, it is the employer’s responsibility to recover and pay back the deferred taxes from the employees.
- Employers who fail to withhold and pay the deferred taxes by April 30, 2021, will be subject to interest, penalties, and additions to tax beginning May 1, 2021.
Although this recent IRS guidance does offer some degree of clarity on issues surrounding the president’s order, there are still many questions that remain unanswered. Among the most pressing questions, we note the following:
- Are employers required to implement the payroll tax deferral? The IRS has provided no official guidance on whether employers can opt-out of the payroll tax deferral order. However, following the release of this most recent guidance, the IRS also released a draft version of a revised Form 941 to account for the deferred employee portion of OASDI tax withholding. The instructions for the new version of Form 941, once finalized and released, may confirm whether employers can opt-out.
- What happens when an employee leaves, is terminated, or doesn’t make enough money to pay back their deferred taxes? The notice does not address what happens in circumstances when an employee leaves the company, or doesn’t make enough money to ratably pay back their deferred taxes. It allows that, if necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide detail on that requirement.
As always, HBE will continue to monitor this issue and provide further updates on new developments as they become available.
This communication and any applicable contents pertaining to COVID-19 employer relief provisions is based on our professional judgment given the facts provided to us and the COVID-19 employer relief provisions guidance as of the date of the communication. Subsequent developments changing the facts provided to us, or differences in the final guidance and regulations once they are issued, may affect the advice provided. These effects may be material.