IRS Provides Initial Guidance on Employee Payroll Tax Deferral

COVID-19 Business Update
Tax Group

Recently, President Trump issued an executive order deferring the deadline to pay workers’ portions of Social Security taxes from September 1, through the end of the year. However, the order had not included guidance for employers or payroll service providers who are responsible for submitting those payments to the Internal Revenue Service on how any tax bill would be handled when it comes due later.

The IRS has now issued much-anticipated guidance on the above payroll tax deferral issue with  (Notice 2020-65).

Under the guidance, employers can defer the withholding, deposit, and payment of workers’ portions of Social Security taxes  on wages paid from September 1 through December 31, 2020. The due date for withholding and payment of these taxes is postponed until the period beginning January 1, 2021, and ending April 30, 2021.

The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000. The notice defines applicable wages, for these purposes, as wages paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020, but only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods.

The notice requires affected employers to withhold and pay the deferred taxes from wages and compensation paid during the period between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021. The notice says, that, if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but does not provide details on that requirement.

President Trump has said he would forgive the deferred payroll tax bills if he’s elected to a second term, but that would require participation from a Congress that has been hesitant to cut the funding source for Social Security.

The U.S. Chamber of Commerce has said that many companies are unlikely to implement the deferral, even with the IRS guidance, because it forces a large tax bill on employees in the future, unless the tax is forgiven by future legislature.  Also, the whole process would create difficulty for employers to administer.

We look forward to future guidance on this issue from the IRS.

For more information on the payroll tax deferral, click here.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.