Last Friday, the IRS issued guidance on the payroll tax deferral that President Trump signed in a presidential memorandum on August 8, 2020. Trump’s directive was intended to aid employee taxpayers with cash flow needs created as a result of the pandemic. It is a deferral, not a forgiveness or reduction, of social security taxes the employee would otherwise have withheld and paid for four months. The notice (Notice 2020-65) directs employers to defer withholding on certain employees’ compensation during the last four months of 2020 and then withhold and pay those deferred amounts during the first four months of 2021.
The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000. Applicable wages, for these purposes, are 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. This threshold amount is applicable to wages paid in each pay period regardless of any other pay period.
It appears then that wages up to $32,000 paid in the four month period, if paid evenly and at least biweekly, should have the employee portion of social security wages (6.2%) deferred and not withheld. The withheld amounts will be required to be repaid during the period between January 1, 2021 and April 30, 2021 by the employer. Starting May 1, 2021, interest, penalties and additions to tax will begin to accrue on unpaid amounts. The guidance also indicates that if it is necessary, employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee.” The new notice does not give any details as to the nature of this statement or its implementation.
Does this mean the employee can give the tax amounts to the employer to compile for payment in 2021 or the employer to set up a loan on their books to compel the employee to pay back? Can the employee opt out of the deferral in its entirety? The statement leaves more questions than answers, but it seems clear that the payments due in 2021 are the responsibility of the employer and not the employee. Therefore, if the employer cannot get reimbursement from the employee, the employer is still liable to pay the amounts in the first quarter of 2021 and will be subject to interest and penalties if not paid timely.
This additional guidance unfortunately does not answer the most fundamental of questions such as: is this deferral mandatory or voluntary for employers or employees? Treasury Secretary Mnuchin said days after President Trump signed the original directive that the deferral would be voluntary; however, there is nothing in the order or notice that indicates that there is a choice in the deferral amounts. President Trump also made reference to these amounts possibly being forgiven if he is elected again, but this statement holds no legal weight under the current law. The AICPA sent a letter on August 12 asking for questions such as these to be addressed, but to date most questions remain unanswered.
We hope to see more guidance in the near term. In the interim, the best we can do is make sure the employees understand the financial ramifications of this order so that they can plan for the repayment of these monies a short three months or less later. This deferral, if not forgiven, may prove to be a burden greater than the employee can bear along with their then-current withholding amounts for current wages.
You may view the IRS guidance on payroll tax deferral on the IRS website.
We will continue to keep you updated. Should you have any questions, please don’t hesitate to reach out to your tonneson + co representative.