IRS Clarifies Employee Payroll Tax Postponement and Leaves Some Questions Unanswered

IRS Clarifies Employee Payroll Tax Postponement and Leaves Some Questions Unanswered

The September 3rd IRS payroll industry telephone conference was dominated by questions regarding the postponement (commonly referred to as deferral) of the employee’s share of Social Security tax.

Background. On August 8, 2020, President Trump signed a Presidential Memorandum directing Treasury Secretary Mnuchin to permit the postponement of the withholding, deposit, and payment of the employee’s share of Social Security tax (6.2%) as well as the employee’s share of Railroad Retirement Tax Act (RRTA) Tier 1 taxes on wages or compensation paid from September 1, 2020 through December 31, 2020 for employees whose amount of wages or compensation, payable during any biweekly pay period generally is less than $4,000, or the equivalent amount with respect to other pay periods. Amounts will be deferred without any penalties, interest, additional amount, or addition to the tax.

Notice 2020-65 provided further guidance to employers and postpones the withholding and remittance of the taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Penalties, interest, and additional amounts would begin to incur on May 1, 2021.

Definition of applicable wages. The IRS clarified that applicable wages are determined on a pay period-by-pay period basis. Specifically, the employer should look at the pay period and determine if whether the employee is eligible for the postponement.

Postponement is optional. The IRS clearly stated that the postponement of the tax is optional for the employer. However, the IRS stated the Notice does not address how to implement the relief so employers are permitted to solicit input from their employees regarding the postponement as well as permitting employees to opt in or opt out if the employer elects to take the postponement.

Employer liability. As the notice clarifies, the employer is the “Affected Taxpayer” and the IRS stated that if an employer is unable to withhold from an employee during January 1, 2021 through April 30, 2021, the employer remains liable for the employee’s share of Social Security tax and must remit the taxes by April 30, 2021 to avoid penalties, interests, and additions. For example, if an employee should terminate on January 2, 2021 before an employer can arrange withholding, the employer remains liable for the postponed amount.

Form 941 reporting. The IRS noted that employers will be reporting the postponement of the employee’s share of Social Security on Form 941 similarly to how employers currently report the deferral of the employer’s share of Social Security. The postponed employee’s share of Social Security tax and deferred employer’s share of Social Security will be reported on line 13b with the postponed employee portion broken out on line 24 in Part 3 of Form 941. The IRS anticipates the final version of Form 941 to be available late September in time for the filing in October.

There will be no schema changes for the 3rd quarter of Form 941. The same elements will be used with new data populations.

Q&A. There were many questions during the Q&A period of the conference covering a wide range of concerns.

Repayment of postponed employee tax. The IRS noted that the repayment process will be similar to the repayment prcoess for the deferral of employer’s share of Social Security tax. The IRS is currently working on guidance on this issue. Rather than a tax deposit, an employer would receive a notice.

Employee requests opt-in. A caller asked whether an employer is required to elect the postponement if an employee requests the relief. The IRS emphasized the postponement is optional and while nothing bars an employer from considering employee input, the employer remains the “Affected Taxpayer” and is not required to use the relief even upon an employee’s request.

Further guidance. When asked if further guidance would be issued on the topic, perhaps in the form of FAQs, the IRS replied that taxpayers with questions have been calling the Notice 2020-65 Hotline at (202) 317-5436. The hotline now features some answers to frequently asked questions. The IRS is looking into ways to get the information out as quickly as possible.

W-2 reporting. Two questions came up regarding W-2 reporting: (1) how postponed amounts would be reported; (2) how to report unrecovered tax for a terminated employee questioned about how the postponed is reported on Form W-2. The IRS stated it is currently working on W-2 guidance. However, it did note that if an employer should end up paying the tax without employee withholding, regular employment tax law would kick in. Like a gross-up, the amounts would qualify as wages. The IRS is working out some instructions on this scenario.

Eligibility for postponement. A caller asked if an employee has Year-to-Date (YTD) wages of $104,000 and during September 1, 2020 through December 31, 2020, the employee has a biweekly pay period where they earned less than $4,000, would the employee be eligible for the postponement. The IRS reiterated that the applicable wages are determined on a pay period basis and the YTD wages would not be considered.

Future forgiveness of postponed taxes. When asked if an employer elects not to use the relief, and Congress passes legislation that forgives the employee’s share of Social Security tax that was postponed, will amounts be refunded to employees. The IRS said it could not comment on the future impact of legislation.

2021 Form 941 reporting. The IRS confirmed that remitted 2020 postponed amounts as provided by a notice from the IRS would not be reported on the 2021 Form 941 or any other 2021 return.

Multiple pay periods. The IRS advised that employers think through the nuances of their pay structures and how the postponement would apply to a particular payment. For example, if an employee is on a bi-weekly pay period for wages and receives a quarterly commission check, the employer should determine eligibility on a pay period basis. The IRS emphasized that employers should do the best possible in applying the Notice.

One-off bonus. When asked about one-off bonuses, the IRS stated supplemental wages were not addressed in the Notice but some questions that may be guiding are whether the bonus has a separate pay period and what the equivalent amount is in terms of the threshold.

Schedule B reporting. The IRS noted that tax liability for a pay period are not impacted if an employer decides to elect the postponement. Because Schedule B refers to liability and not payments, employers should continue to enter the total tax liability for the period. Liability arises at the time when wages are paid. The IRS emphasized that the Presidential Memorandum authorized a postponement of the due date to withhold and pay and does not defer taxes.

Postponement for payment. A caller asked if it was possible to postpone the payment while not postponing the withholding. The IRS explained that the relief is for the withholding and payment of taxes. The IRS stated it would seem that if the relief is not taken for withholding, then relief would not be available for the payment.

Original content by Thomson Reuters – September 4, 2020 This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.