Payroll Tax Deferral Guidance Issued by Treasury, IRS

Payroll Tax Deferral Guidance Issued by Treasury, IRS

The Department of the Treasury, in conjunction with the Internal Revenue Service released guidance on the payroll tax deferral executive order from President Trump last Friday.

What We Know

In layman’s terms, this new guidance defines the following:

  • It allows employers to defer the withholding, deposit, and payment of certain payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020.
  • The deferral applies to the employee portion of the old-age, survivors, and disability insurance (OASDI) tax under Sec. 3101(a) and Railroad Retirement Act Tier 1 tax under Sec. 3201 (also known as Social Security tax).
  • The due date for withholding and payment of these taxes is postponed until the period beginning Jan. 1, 2021, and ending April 30, 2021.
  • The deferral applies to any employee whose pretax wages or compensation during any biweekly pay period generally is less than $4,000.
  • The determination of applicable wages is to be made on a pay-period-by-pay-period basis.
  • Interest, penalties, and additions to tax will begin to accrue on unpaid taxes starting May 1, 2021.
  • It appears to place the responsibility to collect and make payroll tax payments on employers.


What We’re Hearing

A number of tax professionals, employers and industry associations are skeptical of this guidance. In summary:

  • Industry groups have raised concerns that employees could be left owing the deferred taxes next year if they get the extra cash in their paycheck.
  • Many employers have warned they won’t participate in this payroll tax deferral.
  • The new guidance from the IRS raises further questions on how the taxman will ultimately get its share of deferred payroll taxes – and the steps employers will have to take to “make arrangements” with workers to collect the money.


Questions Still Remain

Although this guidance was released as a way for answering lingering questions once the executive order was issued, many unanswered questions still remain. Among those are:

  • What if an employee leaves the company before January 1, 2021?
  • Should the employer withhold the terminated employee’s deferred tax from their final paycheck?
  • What happens if withholding for the deferred amount causes the employee’s wages to fall below the required minimum wage?
  • Can employers opt to defer Social Security tax for certain groups of employees while disqualifying others?
  • What wages count toward the $4,000 threshold? Can bonuses, commissions, and overtime pay be included?
  • What are the Form W-2 requirements for the deferred tax?

As it appears that the employer can decide if they will allow employees to participate in this deferral, a lot of business associations have noted that their member companies are not going to participate. There are two main reasons for this:

    1. They don’t want to put employees in a bad position in 2021 when the money has to be repaid, and
    2. It appears that the onus is on the employer (not the employee) to make sure that the deferred amount gets remitted to the government by the required dates.

As you can imagine, the 2nd reason could present a potential liability to employers if they have an employee who quits prior to paying back all of the deferred tax. The IRS’ memo which was put out late last week indicated that employers can “make arrangements to otherwise collect the total Applicable Taxes from the employee” but did not provide additional guidance beyond that.

At this point, we’re suggesting to our clients that they hold off implementing this measure until further direction is given from the IRS/Treasury Department.

Excerpts taken from:

    1. Journal of Accountancy – Guidance Issued on Payroll Tax Deferral, August 28, 2020
    2. CNBC – IRS Guidelines Put Employers On The Hook for Trump’s Payroll Tax Break, August 28, 2020
    3. CNN – Here’s What The Payroll Tax Deferral Action Means For You, August 31, 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.