On August 8, 2020, President Trump issued a Memorandum entitled “Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster,” directing the Secretary of the Treasury to defer the withholding, deposit, and payment of certain payroll taxes. On August 28, 2020, the IRS provided guidance in Notice 2020-65 related to the Memorandum. Below are answers to some of the frequently asked questions we have received from employers regarding the payroll tax deferral.
What Is Deferred Under the Program?
The deferral program only applies to the employee portion of Social Security taxes (6.2% of wages). The deferral program does not include the employer’s portion of Social Security taxes (6.2%) or the Medicare portion of payroll taxes.
Who is Eligible for Deferral?
The deferral program only applies to those employees whose pretax wages during any bi-weekly pay period from September 1, 2020 to December 31, 2020 is less than $4,000 ($104,000 annually), or the equivalent amount with respect to other pay periods. Eligibility is determined on a pay-period basis, meaning that if an employee’s wages for a bi-weekly pay period is less than $4,000, then the employee is eligible for deferral, irrespective of the amount of wages paid to the employee for other pay periods.
Am I Required to Implement the Payroll Tax Deferral?
No. Employers are not required to implement the payroll tax deferral program; implementation is optional in the employer’s discretion.
Must the Deferred Payroll Taxes Be Paid by a Later Date, and Who is Responsible for Payment?
The payroll tax deferral is a deferral of a tax obligation, not forgiveness of or exemption from, a tax obligation. All deferred taxes must be withheld and paid ratably from wages paid to the employee between January 1, 2021 and April 30, 2021. For example, if an employer typically withholds $100 per paycheck for the employee’s portion of Social Security taxes, the employee’s take-home pay would increase by $100 per paycheck through the end of 2020; however, the employee’s take-home pay would decrease by $200 commencing January 1, 2021, since the employer would withhold the typical $100 plus the additional $100 to account for the deferred taxes until all previously deferred amounts are withheld. Employers remain responsible to pay the taxes, and any deferred payroll taxes not paid by May 1, 2021 will be subject to interest, penalties and additions.
What if an Employee’s Employment Terminates Prior to April 30, 2021?
Additional guidance is necessary to conclusively determine how the deferred tax is collected and paid if an employee terminates prior to April 30, 2021. Notice 2020-65 generally provides that employers may, “if necessary,” “make arrangements” to collect the deferred taxes from the employee; however, little guidance has been provided to determine the scope and permissibility of such “arrangements.” Employers would likely remain liable for the unpaid deferred taxes, and collection attempts may be futile if the employer cannot withhold the remaining amount of deferred payroll taxes from the employee’s last paycheck.
What Risks are Associated with Implementing the Payroll Tax Deferral Program? How Should the Payroll Tax Deferral Program Be Implemented?
Practically, although a participating employee would receive more take-home pay during the period from September 1, 2020 to December 31, 2020, the employee would receive less take-home pay than normal during the period from January 1, 2021 to April 30, 2021. This may lead to decreased employee satisfaction. Further, by participating in the deferral program, employers are taking a risk regarding non‑payment of deferred payroll taxes (since the employer is liable for taxes due). We advise that, if employers choose to implement the payroll tax deferral program, they clearly communicate to employees the implications of the payroll tax deferral program on their personal financial planning and cash flow. Additionally, employers should adjust their payroll systems to account for the increased complexities of tracking the tax deferrals for each employee.