Employee payroll tax deferrals are a messy proposition - Spidell

Employee payroll tax deferrals are a messy proposition


The Treasury and the IRS released guidance today on the deferral of the employee’s share of Social Security taxes pursuant to President Trump’s August 8, 2020, Presidential Memorandum. (IRS Notice 2020-65) Unfortunately, the guidance leaves some important questions unanswered.

The Presidential Memorandum directed the Secretary of the Treasury to use his authority to defer the withholding, deposit, and payment of the employee’s portion of Social Security taxes paid from September 1, 2020, through December 31, 2020. The deferral is only available to employees with wages or compensation of less than $4,000 paid during a bi-weekly pay period, or the equivalent threshold amount with respect to other pay periods. Today’s guidance “implements” that deferral.

The amounts that are not withheld will go to the employees. However, the ultimate liability for the taxes remains with the employer under the guidance. What is not clear from the guidance is whether employers are required to offer this deferral to their qualifying employees, though Treasury Secretary Mnuchin has said he can’t force employers to stop withholding on employees.

If the taxes are deferred, employers must withhold and pay the deferred tax ratably from wages and compensation paid to the employees between January 1, 2021, and April 30, 2021. So the employees will repay the deferral through double withholding during that period. But what if the employee no longer works for the employer? The guidance states that the employer may “make arrangements to otherwise collect the total Applicable Taxes from the employee.” Any amounts still owed by the employer on May 1, 2021, will be subject to penalties, interest, and additions to tax.

The Presidential Memorandum does require the Secretary of the Treasury to explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred, but at this time there is no forgiveness for the deferred taxes.

Employers and employees should consider the potential costs of deferring these taxes as illustrated above before participating in this deferral program.

The guidance is available at:

www.irs.gov/pub/irs-drop/n-20-65.pdf

The Presidential Memorandum is available at:

www.whitehouse.gov/presidential-actions/memorandum-deferring-payroll-tax-obligations-light-ongoing-covid-19-disaster/

Attend Spidell’s 2020/21 Federal and California Tax Update webinar and get the latest information on payroll tax deferrals. Click here for a list of available dates.