IRS Releases Guidance on Payroll Tax Deferral
On August 8th, President Trump signed a presidential memorandum directing the Secretary of the Treasury to defer the withholding, deposit, and payment of certain payroll tax obligations.
In response to this executive action, the Department of Treasury and Internal Revenue Service issued guidance (Notice 2020-65) concerning the payroll tax deferral (commonly referred to as a “payroll tax holiday”). Under this guidance, employers can defer withholding and payment of the employee’s portion of the Social Security tax.
The payroll tax deferral program applies to wages paid between September 1, 2020 and December 31, 2020. Only employees who make less than $4,000 for a bi-weekly pay period are eligible.
The IRS guidance only makes explicit reference to bi-weekly pay periods. Regarding other pay frequencies, the IRS notes that the “equivalent threshold amount with respect to other pay periods” are eligible.
Given the information the IRS does provide, it is presumed that any employee making less than $104,000 annually ($4,000 x 26 pay periods) is eligible to defer their employee-share of the Social Security tax.
Taxes Still Owed, only in 2021
It is important to point out that this is merely a tax deferral, not a forgiveness. The employer must pay the deferred taxes back to the IRS between January 1, 2021 and April 30, 2021.
If the deferred taxes are not paid back by this time, interest, penalties, and additions to tax will begin to accrue on May 1, 2021. The employer remains liable for the employee’s share of Social Security tax; this guidance simply extends the due date for these payments to the first four months of 2021.
The IRS notes that employers may make arrangements to collect the applicable tax from the employee. However, the IRS did not provide any additional guidance for situations where an arrangement cannot be made or if the employee were to quit during this period.
The notice only provides a minimal amount of information for this payroll tax deferral. Many questions remain unanswered. As soon as the IRS releases updated guidance and clarification, HRPro will provide additional information.