On August 28, the IRS issued Notice 2020-65 that provides limited explanation of how employers can defer withholding and remitting an employee’s share of Social Security tax, as part of President Trump’s executive action signed on August 8, 2020.
The President’s action only defers Social Security taxes; it doesn’t forgive them, meaning employees will have to pay the taxes. There are several elements that will remain unknown until the Internal Revenue Service (IRS) issues additional guidance.
In this article, our team has summarized what we know to date and answers a few frequently asked questions. Talk to your Lurie advisor to help you decide what’s best for your business, employees, and how to proceed over the next 4 months.
What Are the Highlights in the Latest IRS Guidance on Payroll Tax Deferral?
- The due date for the withholding and deposit of employee FICA old-age, survivors and disability insurance (OASDI aka Social Security) taxes (6.2%) on wages paid beginning September 1 and ending on December 31 is postponed until early 2021.
- Only FICA taxes on wages below $104,000 annually (or $4,000 per bi-weekly pay period or equivalent for other pay periods) are eligible for the deferral. No pro-rata deferral is permitted if wages are above the threshold.
- If an employee makes more than $4,000 on any pay period, you will have to apply the test to each pay period. An employee making more than the wage threshold on a pay period is ineligible for the deferral for that pay period.
- Deferred taxes must be collected through withholding by the employer beginning on January 1 through April 30, 2021, and deposited accordingly. Only the time for withholding the taxes has changed pursuant to the Notice, not the deposit timing rules. However, the deposit timing rules only take effect once the taxes have been withheld.
How Could Employers End Up Owing Deferred Taxes?
- Under the Treasury Notice, employers remain liable for paying employment taxes, whether they withheld such taxes or not. The Treasury Notice requires employers to withhold the amounts deferred ratably from wages and compensation paid between January 1 and April 30, 2021. If Congress does not enact corresponding legislation to forgive the amounts deferred, employers will remain liable.
- The Treasury Notice allows an employer, if necessary, to “make arrangements to otherwise collect” the total deferred taxes from the employee. The Treasury Notice does not provide any further guidance on how an employer may otherwise collect the deferred taxes. We recommend that employers who have seasonal employees, or other situations where employees or staff counts may be reduced in 2021, to prepare accordingly and make arrangements for withholding applicable taxes by the end of the employee’s term of employment.
- If an employer fails to withhold and pay the total deferred taxes by April 30, 2021, interest, penalties and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid deferred taxes.
- If an employee is terminated before the tax is withheld, the employer remains liable for paying the tax.
- At present, IRS guidance does not indicate if certain situations are exempt, such as family and medical leave, or paid or unpaid maternity leave, for example.
Is It Optional, or Required, for Employers to Participate in the Payroll Tax Deferral?
It is not clear from the published guidance whether this is optional on the part of employers, or whether employees can compel their employer to defer the tax.
With so little time between Treasury’s guidance and the start of the payroll tax deferral period, so many unanswered questions, and so much additional risk, most employers need to make the decision best for their situation. Here are some considerations:
- The employee payroll tax deferral temporarily increases the take-home pay for the employees for the remainder of 2020.
- Effective January 1, 2021, it effectively reduces the take-home pay for the employees by the same amount if they are still employed.
- Administrative difficulty in tracking deferrals and uncertainty for the employer.
- Employer may be liable for unpaid taxes in situations such as termination, seasonal work, maternity leave, and possibly others.
- The rapid implementation of this change has payroll companies scrambling to comply, which may result in errors and additional fees charged by payroll companies.
As an Employer, How Do I Implement the Program?
For employers who plan on implementing the payroll tax deferral program, here are some suggestions to make the process easier and to protect all involved parties:
- Talk to your payroll provider, as many are requiring employers to opt-in to the deferral.
- Make it clear to employees who opt-in that their deferred Social Security taxes will have to be paid back between January 1 and April 30, 2021 through increased withholding.
- We recommend that you have employees sign a contract agreeing to:
- Additional withholding up to twice the normal amount of Social Security taxes in the period from January 1 through April 30, 2021.
- The employee will reimburse the employer for any deferred payroll taxes should the employee leave the company prior to such a time when all deferred payroll taxes have been repaid.
- Create a plan to account for repayment of deferred payroll taxes should the affected employee be earning less in 2021 than he or she earned in 2020.
- Provide direction to your payroll team and provider for adjusting paychecks to reflect the deferral.
What If We Already Elected to Defer Payroll Under the CARES Act?
Under the CARES Act, employers can already defer paying the employer’s portion of Social Security taxes through December 31, 2020. All 2020 employer’s share of Social Security deferred amounts are due in two equal installments — one at the end of 2021 and the other at the end of 2022.
The President’s executive action is a separate program with a different payment timeline. You have a much longer time to defer the employer’s portion, but the employee portion is due within months. These are separate programs with separate timelines.
For additional information on the CARES Act please visit the link here.
For more information on the IRS FAQ for employer’s payroll tax deferral visit the link here.
Meet Our Team
With more than a decade of federal tax experience, Mike provides advice on federal tax matters. He routinely advises on IRS practice and procedure including examination, appeals, collection, penalty abatement, audit reconsideration, research, captive insurance disclosures, Private Letter Rulings, and other federal tax issues.
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