What Employers Need to Know About the Payroll Tax Deferral Guidance

Birmingham Business Journal

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Following President Trump’s Aug. 8 presidential memorandum directing the Treasury Secretary to defer the withholding and payment of certain employee payroll taxes, the Internal Revenue Service released Notice 2020-65 on Aug. 28

The two-page notice gives necessary but sparse guidance on implementing the Presidential Memorandum.

Employers now have the option of deferring the withholding and remittance of eligible employee’s Social Security tax from their paychecks for the period September 1 through December 31, 2020. The Social Security tax equals 6.2% of the employee’s wages. The option to withhold/remit the employee’s share of the Social Security tax, however, will only apply if the employee earns less than $4,000 bi-weekly, or approximately $104,000 a year. For a minimum wage earner at $7.25 per 40-hour week, the withheld Social Security tax would be equal to roughly $36 every two weeks.

Although the withholding, deposit, and payment of the employee’s Social Security tax for this four-month period is deferred, the tax remains due. The notice clarifies that any taxes deferred will be due and payable during the period January 1 through April 30, 2021, and implies that it should be withheld and remitted ratably over that period. In essence, unless the tax is forgiven by subsequent legislation, as President Trump promises if he is re-elected, the employer may be forced to withhold and remit twice the normal amounts (i.e., 12.4% of wages) during that period. That could place the employee in a personal cash flow crunch.

The Presidential Memorandum was intended to provide temporary assistance to employees while a new COVID-19 tax relief bill is stalled in Congress. With the IRS’s notice on how to implement this plan, there are still several open questions that can make it less than desirable for employers to implement the deferral, or for employees to want the deferral. And there is no clear statement in the notice whether an employer or an employee can opt-out of the deferred withholding program to avoid a scenario such as the one described above.

However, Treasury Secretary Steven Mnuchin was quoted recently regarding the payroll tax deferral, “We can't force people to participate,” and the notice seems to support that statement.

To illustrate, what if the employer wishes to opt-in to the program but one or more otherwise eligible employees don’t wish to participate? The notice defines the “Affected Taxpayer” as the employer – not the employee, nor both. Thus, it appears the employer is the sole decision-maker, although it may be wise, from the perspective of employee relations, to allow otherwise eligible employees to opt-out in writing within a narrow time frame.

Additionally, if a current employee leaves the company during the four month recapture period, so there are no wages from which the employer can recoup the payroll tax, the employer very likely will be responsible for remitting the deferred amount to the IRS even though never collected from the (former) employee.

Finally, the notice reminds employers if they opt-in to the program and therefore don’t withhold the employee’s Social Security tax during the next four months, but for whatever reason (e.g., cash flow issues) they don’t remit the deferred taxes by April 30, 2021, they’ll become subject to “interest, penalties and additions to tax....” That would potentially include personal liability for the “responsible persons” under IRC section 6672.

As mentioned above, further guidance is needed on several issues, including the impact of this program on employers using employee leasing companies, such as Certified Professional Employer Organizations. Revised Forms 941 and W-2 will be important as well.

Republished with permission. This article, "What Employers Need to Know About the Payroll Tax Guidance," was published on September 2, 2020 by the Birmingham Business Journal.