Internal Revenue Service Issues Guidance on Payroll Tax Deferral

Employers should carefully consider the implementation of the deferral, as there may be significant risk and complexity to an employer who opts to defer the employee taxes under the Notice.

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Insights  <  IRS Issues Guidance on Payroll Tax Deferral

Employers should carefully consider the implementation of the deferral, as there may be significant risk and complexity to an employer who opts to defer the employee taxes under the Notice.

The Internal Revenue Service (IRS) released Notice 2020-65 on August 28, 2020, providing brief implementation guidance on the deferral of employee payroll taxes first described in President Trump’s Presidential Memorandum dated August 8, 2020.

In the Memorandum, the President directed the Secretary of the Treasury, using the Treasury’s authority under Section 7508A, to defer withholding, deposit and payment by employers of the employee portion of certain social security (and related railroad retirement) taxes on wages or compensation paid during the period September 1, 2020, through December 31, 2020.

Employers should carefully consider the implementation of the deferral, however, as there may be significant risk and complexity to an employer who opts to defer the employee taxes under the Notice.

While the Presidential Memorandum also directed the Secretary to “explore avenues, including legislation” for tax forgiveness, wording in the Notice 2020-65 includes no wording that addresses forgiveness of the repayment obligation. It does provide the following guidance and terms:

Affected Taxpayers

The Notice explains that the employer is the Affected Taxpayer. Specifically, “the Secretary has determined that employers that are required to withhold and pay the employee share of social security tax…” are defined as Affected Taxpayers.

The Notice does not explicitly state that the deferral is optional for employers. However, because Section 7508A merely permits postponement and does not prohibit timely withholding and payment, the implementation of the deferral seems to be at the discretion of the employer.

Applicable Taxes

The deferral applies to the employee’s portion of the old-age, survivors and disability insurance (OASDI) tax under section 3101(a) (6.2%) and of the related Railroad Retirement Tax Act (RRTA) under section 3201(a). The deferral does not include the employee’s share of the Medicare portion of the FICA tax (1.45%).

Applicable Wages

Applicable Wages generally include wages and compensation paid to an employee on a pay date during the period beginning September 1, 2020, and ending on December 31, 2020. For purposes of this Notice, Applicable Wages are determined using the definition of wages and compensation under sections 3121(a) or 3231(e). Any amounts excluded from those definitions would also be excluded when determining Applicable Wages.

Furthermore, the deferral applies to any employee whose pretax wages or compensation paid during any bi-weekly period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to any other pay periods. Eligibility for deferral must be monitored as the determination of Applicable Wages is made on a pay-period-by pay-period basis. In other words, employees with variable compensation may be eligible for deferral in some pay periods and ineligible in others.

Lastly, it is important to realize that the threshold presents a wage cliff; payments at or above the threshold amounts for the related pay period would not qualify for any deferral.  

Postponement of Due Date for Withholding

For Affected Taxpayers (i.e. employers), the due date for the withholding and payment of the applicable taxes is postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. A footnote in the Notice explains that the employer’s deposit obligation does not arise until the tax is withheld. By postponing the time for withholding tax, the deposit obligation is automatically delayed until the withholding occurs. In other words, employers are not allowed to withhold as they normally would and simply delay the payment and deposit of the taxes; if the taxes are withheld, they must be deposited.

Payment of Deferred Applicable Taxes

Affected Taxpayers must withhold and pay the total Applicable Taxes that were deferred under this Notice ratably from the wages and compensation paid between January 1, 2021 and April 30, 2021. Penalties, interest and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The Notice goes on to state that, if necessary, employers can make arrangements to otherwise collect the total Applicable Taxes from the employee but does not offer any further details or guidance on how to do so. Therefore, if employees are terminated or do not have enough wages during the repayment period, the employer will still bear the ultimate responsibility for those taxes.

Questions remain about the practical application of the implementation guidance in the Notice, including:

  • Whether employees can opt-in or opt-out of the deferral if their employers elect to implement the guidance in the Notice;
  • Whether the election by the employer to defer these taxes can be made retroactively to September 1, 2020, given the limited time after the Notice was issued to update processes and systems. Following the release of the guidance, the IRS released a draft Form 941, the key change being the inclusion of a line asking for the “Deferred amount of the employee share of social security tax included in line 13b”. However, as of this writing, accompanying instructions have not been released;
  • Whether the additional take-home pay during the last four months of the 2020 calendar year may be used to satisfy other employee obligations, such as 401k loans or wage garnishments.

Be Transparent with Employees

While we await additional clarification and guidance, it will be important for companies and organizations to be clear with their employees about the potential impact of tax deferral. As such, employees must understand that the deferred taxes will be collected through increased withholding and that their take-home pay between January 1, 2021 and April 30, 2021 will decrease as a result.

Take-Away Conclusion

The burden of the deferral program rests entirely with the employer and implementation could be administratively burdensome and potentially costly. Companies and organizations interested in offering the deferral option to their employees should fully understand the complexities, cost and risk associated with doing so. Many who perform this assessment are electing to forgo participation in the program. Those that choose to proceed are encouraged to contact legal counsel and tax advisors to explore ways in which they can mitigate their risk.

Disclaimers: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation

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