Twenty days following the Trump Administration’s Executive Order on the deferral of employee payroll tax obligations, and two days before the deferral took effect, the IRS and Treasury have issued initial guidance (Notice 2020-65) on the implementation of the deferral process. The deferral applies to withholding, deposit, and payment of certain payroll taxes on wages paid from September 1 through December 31, 2020.
Who is Affected by the Payment Tax Deferral?
Relief is granted to employers who are required to withhold and pay the employee share of Social Security tax (or the railroad tax equivalent). Specifically, employers can defer the 6.2% tax on employee wages imposed by the Internal Revenue Code.
The payroll tax deferral applies to employees who have wages and compensation of less than $4,000 on a pretax basis in a given biweekly payroll period from September 1 to December 31, the equivalent of $104,000 a year. One of the most significant challenges for employers will be monitoring when employees rise above or fall below this threshold. In other words, their payroll systems will have to be able to turn on and off the deferral accordingly for each pay period.
While the Notice does not explicitly state whether an employer is required to implement the deferral, it appears that they do have a choice, based on a section of the Internal Revenue Code that does not permit the IRS to prohibit the timely withholding and payment of taxes.
When Will the Deferred Taxes Need to Be Paid?
The guidance makes it clear that the deferral will not be forgiven. The due date for the withholding and payment of the tax for “applicable wages” is postponed until the period beginning January 1, 2021 and ending on April 30, 2021. Taxes not repaid by April 30 will begin to accrue interest and penalties beginning May 1, 2021.
Further guidance will be needed to answer many questions, some of which include:
- As noted above, the Internal Revenue Code prohibits the timely withholding and payment of taxes. However, employers are waiting for clarification about whether deferral is elective. Employers that do participate may give employees the choice of opting into the deferral, but that will depend on the company.
- Employers will have to allow for situations such as when employees with deferred taxes leave the company before the taxes are collected. Taxes may need to be collected from the final paycheck, for example. Further guidance is needed for special situations.
- Business leaders have expressed concern about the heavy tax burden the deferral will cause employees during the first quarter of 2021. It is unclear whether additional guidance will address this issue.
GPP will continue to monitor and provide updates on further guidance.
If your business needs assistance during this challenging time, the Business Advisory Group at Goldin Peiser & Peiser can help you determine the best course to take. Contact us at CARETeam@GPPcpa.com.
Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.