Author: Lindsey Jackson, CPA
The Internal Revenue Service issued guidance regarding the employee payroll tax deferral described in the Presidential memorandum from August 8th. IRS Notice 2020-65 provides details to employers who are considering taking advantage of the Presidential Memorandum and defer the withholding and payment of the employee’s portion of Social Security tax.Participating in the payroll tax deferral is voluntary.
Employers may defer the withholding, deposit, and payment of the Social Security tax on wages (6.2% of employee wages) paid to employees beginning on September 1, 2020, and ending on December 31, 2020. The deferral only applies if the amount of such pretax 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 determination of whether an employee’s wages are under the applicable threshold is made on a pay period-by-pay period basis, such that the amount of wages or compensation paid to the employee for other pay periods is not considered.
An employer that elects to defer its payroll tax obligations must withhold and pay the total deferred taxes ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Employers will be required to withhold additional payroll taxes from their employees in order to repay the deferred tax obligation. Notice 2020-65 makes it clear that the responsibility of repayment of the deferred payroll taxes is the responsibility of the employer.The employer may make arrangements to collect the deferred taxes from the employee.
The Notice leaves many questions unanswered questions for those employers considering the payroll tax deferral. Below are a few of those key questions that remain unanswered:
- May individual employees opt out of the deferral and request that their applicable taxes be withheld and paid by the employer?
- Must an employer apply the deferment to all employees under the applicable threshold, or may the employer defer its payroll tax obligations for only a portion of its employees under the applicable threshold?
- What are the consequences if an employee leaves before an employer is able to collect the deferred tax? As an employer is liable for remitting the deferred payroll taxes, if they are unable to collect the deferred taxes from an employee will they be liable for the tax and failure to withhold penalties?
Employers making the decision on whether they will participate in the payroll tax deferral should carefully review all guidance issued before making a determination on whether to participate.
The IRS Notice 2020-65 may be found here.The Presidential memorandum may be found here.
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